MASTER OF BUSINESS ADMINISTRATION (MBA) ENTREPRENEURSHIP DEVELOPMENT UNIT I ENTREPRENEURAL COMPETENCE Entrepreneurship concept ~ Entrepreneurship as a Career — Entrepreneur — Perso Characteristics of Successful. Entrepreneur — Knowledge and Skills Required Toi Entrepreneur. UNIT Il ENTREPRENEURAL ENVIRONMENT Business Environment - Role of Family and Society - Entrepreneurship Development Training and Other Support Organisational Services - Central and State Government Industrial Policies and Regulations - International Business. UNIT III BUSINESS PLAN PREPARATION Sources of Product for Business ~ Pre-feasibility Study - Criteria for Selection of Product ~ Ownership - Capital - Budgeting Project Profile Preparation - Matching Entrepreneur with the Project - Feasibility Report Preparation and Evaluation Criteri UNIT IV LAUNCHING OF SMALL BUSINESS Finance and Human Resource Mobilization Operations Planning - Market and Channel Selection ~ Growth Strategies - Product Launching. UNIT V MANAGEMENT OF SMALL BUSINESS Monitoring and Evaluation of Business - Preventing Sickness and Rehabilitation of Business Units - Effective Management of small Business. Created with @ nitro” professional download the ree tral online a tropd.com/orofesionalREFERENCES: 1. Hisrich, ‘Entrepreneurship’, Tata McGraw Hill, New Delhi, 2001. 2. P, Saravanavel, ‘Entrepreneurial Development’, Ess Pee kay Publishing House, Chennai - 1997. 3. SS.Khanka, ‘Entrepreneurial Development’, S.Chand and Company Limited, New Delhi, 2001. 4. Prasama Chandra, Projects ~ ‘Planning, Analysis, Selection, Implementation and Reviews’, Tata McGraw-Hill Publishing Company Limited 1996. 5. P.C.Jain (ed), ‘Handbook for New Entrepreneurs’, EDII, Oxford University Press, New Delhi, 1999. Staff College for Technical Education, Manila and Centre for Research and Industrial Staff Performance, Bhopal, ‘Entrepreneurship Development’, Tata McGraw-Hill Publishing Company Lid, New Delhi, 1998. Created with @® nitro” professional download the ree tral online a tropd.com/orofesionalUNITI Lt 12 13 14 Ls 16 UNIT 21 22 23 24 UNIT HL 31 32 33 34 UNITIV 41 42 43 44 UNIT -V 5 5.2 Contents Entrepreneurial Competence Evolution of the concept of Entrepreneur Characteristics of an Entrepreneur pistinetion between an Entrepreneur & a Manager Functions of an Entrepreneur Types of Entrepreneur Intrapreneur Entrepreneurial Environment Business Environment Types of Ownership Government Policies for Small Scale Enterprise Small Enterprise in International Business Business Pian Preparation Project Identification & Classification Project Formulation Project Design & Network analysis Project Appraisal Launching of Small Business Production & Operation Management Marketing Management, Human Resource Management Accounting for Small Enterprises Management of Small Business Growth Strategies in Small Business Sickness in Small Business Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesionalUNIT I ENTREPRENEURSHIP DEVELOPMEN’ ENTREPRENEURIAL COMPETENCE, v Evolution of the concept of Entrepreneur v Characteristics of an Entrepreneur Distinction between an Entrepreneur & a Manager Functions of an Entrepreneur ‘Types of Entrepreneur vvvv Intrapreneur Learning Objectives On completion of this chapter, you should be able to: Explain who is an entrepreneur and what his characteristics are, Distinguish between an entrepreneur and a manager Describe the various functions performed by an entrepreneur. Discuss the various types of entrepreneurs. Define Intrapreneur. vvvvyv Normally in a book on Entrepreneurial Development, one would expect in the first chapter to be exposed to the concept of entrepreneur and its related aspects. This chapter is accordingly designed to deal with the same. Let us begin with the evolution of the concept of entrepreneur. Evolution of the Concept of Entrepreneur The word ‘entrepreneur’ has been taken from the French language where it cradled and originally meant to designate an organizer of musical or other entertainments. Oxford English Dictionary (in 1897) also defined an entrepreneur in similar way as” the director or a manager of public musical institution, one who ‘get-up’ entertainment, especially musical performance”. In the carly 16" century, it was applied to those who were engaged in military expeditions. It was extended to cover civil engineering activities such s construction and fortification in the 17" century. It was only in the beginning of the 18" century that the word was used to refer to economic aspects, In this way, the evolution of the concept of entrepreneur is considered over more than two centuries, since then, the term, ‘entrepreneur’ is used in various ways and various Created witr @ nitro” professional download the ree tral online a tropd.com/orofesionalviews. These views are broadly classified into three groups, namely, risk-bearer, organizer and innovator. Now, are discussing below each of these views. Entrepreneur as a Risk-Bearer Richard Cantillon, an Irish man living in France, was the first who introduced the term ‘entrepreneur’ and his unique risk-bearing function in economics in the early 18" century. He defined entrepreneur as an agent who buys factors of production at certain prices in order to combine them into a product with a view to selling it at uncertain prices in future? He illustrated a farmer who pays out contractual incomes which are certain to the landlords and laborers and sells at prices that are ‘uncertain’. He further states that so do merchants also who make certain Payments in expectation of uncertain receipts. Thus, they too are ‘risk-bearing’ agents of production. Krnight also described entrepreneur to be a specialized group of persons who bear uncertainly. Uncertainly is defied as a risk which cannot be insured against and is incalculable. He, thus, draws a distinction between ordinary risk and uncertainly. A risk can be reduced through the insurance principle, where the distribution of the outcome in a group of instances is known, On the contrary, uncertainly is the risk which cannot be calculated, The entrepreneur, according to knight, is the economic functionary who undertakes such responsibility of uncertainly which by its very nature cannot be insured, nor capitalized nor salaried too. Entrepreneur as an Organizer Jean-Baptiste Say, and aristocratic industrialist, with his unpleasant practical experiences developed the concept of entrepreneur a little further which survived for almost two eenturice He definition associates entrepreneur with the functions of coordination, organization and Supervision. According to him, an entrepreneur is one who combines the land of one, the labour of another and the capital of yet another, and, thus produces a product. By selling the product in the market, he pays interest on capital, rent on land and wages to labourers. and what remains is hisher profit. Thus, say has made a clear distinction between the role of the capitalist as a financer and the entrepreneur as an organizer. He further elaborates that in the course of undertaking a number of complex operations like obstacles to be surmounted, anxities to be suppressed misfortunes to be repaired and expedients to be devised, three more implicit factors are demand to be essential. These are: » Moral qualities for work judgment, perseverance and a knowledge about the business world, > Command over sufficient capital, and > Uncertainty of profits. Created w @ nitro” professional download the ree tral online a tropd.com/orofesionalMarshall also advocated the significance of organization among the services of special class of business undertakers. Entrepreneur as an Innovator Joseph A. Schumpeter, for the first time in 1934, assigned a crucial role of ‘innovation’ to the entrepreneur in his magnum opus “Theory of Economic Development’. Schumpeter considered economic development as discrete dynamic change brought by entrepreneur by instituting new combinations of production i.e., innovations. The introduction of new combination of factors of production, according to him, may occur in any one of the following five forms. > The introduced of a new product in the market, > The instituting of a new production technology which is not yet tested by experience in the branch of manufacture concemed. > The opening of a new market into which the specific product has not previously entered. > The discovery of a new source of supply of raw material. > The carrying out of the new form of organization of any industry by creating of a monopoly position or the breaking up of if. Schumpeter also made a distinction between an inventor and an innovator. An inventor is one who discovers new methods and new materials. And, an innovator utilizes inventions and discoveries in order to make new combination, In sum, the concept of the entrepreneur is intimately associated with the three elements risk- bearing, organizing and innovating. Thus, an entrepreneur can be defined as a person who tries to create something new, organizes production and undertakes risks and handles economic uncertainly involved in enterprise. A haracteristics of an Entrepreneur If we go through the business history of India, we come across the make of persons who have emerged as successful entrepreneurs. For example, Tata, Birla, Modi, Dalmia, Kirlosjer and others are well-known name of successful entrepreneurs in the country who started their business enterprises with small size and made good fortunes. Success or otherwise of a small enterprise is, to a great extent, attributed to the success or otherwise of the entrepreneur himself / herself. Then, the question is; what makes the entrepreneurs successful? Whether they had anything common in their personal characteristics? The scanning of their personal characteristics shows that there are certain characteristics of entrepreneurs which are found usually prominent in them. The principal ones are scanned and discussed her: Created with @ nitro” professional download the ree tral online a tropd.com/orofesional1. Hard Work willingness to work hard distinguishes a successful entrepreneur {rom unsuccessful one, The entrepreneur with his tedious, sweat-filled hours and perseverance revive their business even from on verge of failure. In nutshell, most of the successful entrepreneurs work hard endlessly, especially in the beginning and the same becomes their whole life. 2. Desire for High Achievement The entrepreneurs have a strong desire to achieve high goals in business. This high achievement motive strengthened them to surmount the obstacles, suppress anxities, repair misfortunes and devise expedients and only set up and run a successful business 3. Highly Optimistic the successful entrepreneurs are not disturbed by the present problems faced by them. They are optimistic for future that the situations will become favourable to business in future. Thus, they can run their enterprises ‘successfully in future. 4, Independence one of the common characteristics of the successful entrepreneurs has been that they do not like to be guided by others and to follow their routine. They resist to be pigeonholed. They liked to be independent in the matters of their business. 5. Foresight the entrepreneurs have a good foresight to know about future business environment. In other words, they well visualize the likely changes to take place in market, consumer attitude, technological developments, etc and take timely actions accordingly. 6. Good Organizer Different resources required for production are divorced from each other. It is the ability for the entrepreneurs that brings together all resources required for starting up an enterprise and then to produce goods. 7. Innovative Production is meant to meet the customers’ requirements. (fn view of the changing taste of customers from time to time, the entrepreneurs initiate research and innovative activities to produce goods to satisfy the customers’ changing demands for the products. The research Created with ® nitro” professional download the ree tral online a tropd.com/orofesionalinstitutes / centers established by Tata, Birla, Kirloskar, etc, are examples of the innovative activities taken by the successful entrepreneurs in our country. Distinction between an Entrepreneur and a Manager Sometimes, the two terms, namely, an entrepreneur and a manager are considered as synonym, i.e., meaning the same. In fact, the two terms are two economic concepts meaning two different meanings. The major points of distinction between the two are presented in following table. Difference between an Entrepreneur and a Manager Points Entrepreneur Manager 1 | Motive The main motive of an entrepreneur is to start a venture by setting up an enterprise. He understands the venture for his persona gratification. But, the main motive of a manager is to render his services in an enterprise already set up by’ someone else. 2 | Stutus ‘An entrepreneur is the owner of the enterprise ‘A manager is the servant in the enterprise owned by the entrepreneur 3 | Risk-bearing ‘An entrepreneur being the owner of the enterprise assumes all risks and uncertainty involved in running the enterprise. A manager as a servant does not bear any risk involved in the enterprise. 4 | Rewards The reward an entrepreneur gets for bearing risks involved in the enterprise is profit which is highly uncertain, ‘A manager gets salary as reward for the services rendered by him in the enterprise. Salary of a manager is certain and fixed. 5 | Innovation Entrepreneur himself thinks over what and how to produce goods to meet the changing demands of the customers. Hence, he acts as an innovator also called a ‘change-agent’. But, what a manager does is simply to execute the plans prepared by the entrepreneur, Thus, a manager simply translates the entrepreneur’s ideas into practice. 6 | Qualification ‘An entrepreneur needs to possess qualities and qualification like high achievement motive, originality in thinking, foresight, risk-bearing ability and so on. (On the contrary, a manager needs to possess distinct qualifications in terms of sound knowledge in ‘management theory and practice. Created with @ nitro” professional download the ree tral online a tropd.com/orofesionalAfter going through the above points of distinctions, it is clear that an entrepreneur differs from a manager. At times, an entrepreneur can be a manager also, but a manager cannot be entrepreneur. After all, an entrepreneur is a owner, but a manager is a servant, Functions of an Entrepreneur An entrepreneur does perform all the functions necessary right from the genesis of an idea up to the establishment of an enterprise. These can be listed in the following sequential manner: Idea generation and scanning of the best suitable idea. Determination of the business objectives. Product analysis and market research. Determination of form of ownership / organization. Completion of promotional formalities. Raising necessary funds, Procuring machine and material. Recruitment of men, Undertaking,the business operations. VV VVVVVVY Kilby has enumerated about 13 functions of an entrepreneur. While others can also add certain more functions to this list, the said functions appear to be major ones. For our convenience, we have classified all the entrepreneurial functions into three broad categories: > Risk-bearing > Organization > Innovation We have already discussed these functions in the beginning of the chapter under section while elucidating the concept of entrepreneur. Therefore, their discussion has been avoided here for the sake of repitition. ‘Pypes of Entrepreneurs Clarence Danhof, on the basis of his study of the American Agriculture, classified entrepreneurs in the manner that at the initial stage of economic development, entrepreneurs have less initiative and drive and as economic development proceeds, they become more innovating and enthusiastic. Basing on this, he classified entrepreneurs into four types. These are discussed in seriatim, Created with @ nitro” professional download the ree tral online a tropd.com/orofesional1, Innovating Entrepreneurs An innovating entrepreneur is one who introduces new goods, inaugurates new method of production, discovers new market and reorganizes the enterprise. It is important to note that such entrepreneurs can work only when a certain level of development is already achieved, and people look forward to change and improvement. 2. Imitative Entrepreneurs these are characterized by readiness to adopt successful innovations inaugurated by innovating entrepreneurs. Imitative entrepreneurs do not innovate the changes themselves, they only imitate techniques and technology innovated by others. Such types of entrepreneurs are particularly suitable for the under-developed regions for bringing a mushroom drive of imitation of new combinations of factors of production already available in developed regions 3. Fabian entrepreneurs Fabian entrepreneur are characterized by very great caution and skepticism in experimenting any change in their enterprises. They imitate only when it becomes perfectly clear that failure to do so would result in a loss of the relative position in the enterprise, 4, Drone Entrepreneurs These are characterized by a refusal to adopt opportunities to make changes in production formulae even at the cost of severely reduced retums relative to other like producers. Such entrepreneurs may even suffer from losses but they are not ready to make changes in their existing production methods. Following are some more types of entrepreneurs listed by some other behavioral scientists. 1, Solo Operators ‘These are the entrepreneurs who essentially work alone and, if needed at all, employ a few employees. In the beginning, most of the entrepreneur start their enterprises like them. Active Partners ‘Active partners are those entrepreneurs who start/carry on an enterprise as a joint venture. It is important that all of them actively participate in the operations of the business. Entrepreneurs who only contribute funds to the enterprise but do not actively participate in business activity are called simply ‘partners’. 10 Created with @ nitro” professional download the ree tral online a tropd.com/orofesionalInventors Such entrepreneurs with their competence and inventiveness invent new products. Their basic interest lies in research and innovative activities. Challengers These are the entrepreneurs who plunge into industry because of the challenges it presents. When one challenge seems to be met, they begin to look for new challenges. Buyers These are those entrepreneurs who do not like to bear much risk. Hence, in order t reduce risk involved in setting up a new enterprise, they like to buy the ongoing one. Lifetimers ‘These entrepreneurs take business as an integral part to their life. Usually, the family enterprise and businesses which mainly depend on exercise of personal skill fall in this type / category of entrepreneurs. Intrapreneur Oflate, a new breed of entrepreneurs is coming to the fore in large industrial organizations. They are called ‘Intrapreneur’. They Having understood the meanings of entrepreneur and intrapreneur, now the two can easily be distinguished from each other on the following basses: S.No Difference Entrepreneur Intrapreneur 1 | Dependency ‘An entrepreneur is independent in | But, an intrapreneur is his operations dependent on the entrepreneur, i.¢., the intrapreneur does not raise the owner funds. 2 [Raising ofFunds | An entrepreneur himself raises | Funds are not raised by funds required for the enterprise. _| the intrapreneur.z re Createdw @ nitro” professional download the ree tral online a tropd.com/orofesionalRisk Entrepreneur bears the risk | An intrapreneur does not involved in the business fully bear the risk involved inthe enterprise. 4 | Operation ‘An entrepreneur operates from|On the contrary, an outside. intrapreneur operates from within the organization itself. l aes _ Let us sum up Difference people have defined entrepreneur differently. The commonest definition of an entrepreneur is a person who organizes, manages and takes the risk of running an enterprise. He arranges everything required to set up an enterprise i.e., funds, lands, people, material and machinery. The entrepreneurs retain common characteristics of independence, motivation, optimistic, dynamic, innovating and risk-bearing ability. An entrepreneur differs from a manager on various counts. The former is owner, whereas the latter is servant. Entrepreneurs is rewarded with profit which is highly uncertain. On the other hand, gets salary as a rewarded for the services rendered by him in the enterprises. The main functions performed by the entrepreneur are risk-bearing, organization and innovation. The entrepreneurs are broadly classified into four types, namely, imitative, innovative, Fabian and drone entrepreneurs. The entrepreneurs emerging from within the confines of organization are called ‘intrapreneurs’. The intrapreneurs’ are top executives encouraged to catch hold of new ideas to convert them onto products. Intrapreneurship serves as a sced-bed for the development of innovative entrepreneurship. Innovation is the hallmark of entrepreneurship. 12 Created with @ nitro” professional download the ree tral online a tropd.com/orofesionalUNIT- ENTREPRENEURIAL ENVIRONMENT > Business Environment > Types of Ownership > Government policies for small scale enterprise > Small enterprise in international business Factors influencing the emergence of entrepreneurship Entrepreneurship ‘The factors influencing emergence of entrepreneurship can be categorized as > Intemal > External (or) > Economic; and non-economic Internal factors The intemal factors are related to the personality of an individual and they are psychological in nature that motivate a person to become an entrepreneur. Such factors are like a seed of entrepreneurship, existing within an individual. All that is required is the right type of external environment for seed to grow. We have covered the characteristics of entrepreneur in detail in chapter 2. we can recall a few of them here such as the need for achievement, being innovative, courageous, confident, self-reliant, etc. if an individual does not posses these internal characteristics, he/she has to develop them to become a successful entrepreneur. The negative factors are lack of confidence and courage. Some people have ideas but lack confident and courage to go on their ows. This inhibits the entrepreneurship. Pure entrepreneurs, first generation entrepreneurs are clear examples of entrepreneurship emerging because of force of intemal factors. Family Atmosphere Family background plays a very significant role in fostering entrepreneurship. Personality of a Person is influenced by the family background right from birth. The seed of entrepreneurship in an individual develops roots in the right family atmosphere. For example, Children in the Marwari families in India, are brought up in an environment which develops entrepreneurial qualities in them from an early age. The joint Hindu Family system also promotes 13 Created with @ nitro” professional download the ree tral online a tropd.com/orofesionalentrepreneurship by providing the right environment, developing skills and building strong traditions and customs. By and large, certain type of family environment prepares family, members for certain types of business, profession or occupation. Those born in rich business families have the advantage of experience over a new ones. First generation and the second generation entrepreneurs are two examples. In North Indian families a lost of freedom and facilities are given to children, Freedom and_development go together. Some of their children do not give much importance to education as they know that they do not have to hunt for jobs but have ready businesses to take care. South Indian families on the other hand, believe in high education as they go in for jobs. The risk taking abilities are comparatively low among south Indians. In some families even if a child wants to be an entrepreneur, this is objected to by the partners. They feel more secure with fixed income which comes regularly in salaried employment. In India, a major share of entrepreneurship is family based. Most of the businesses are family based. This means that the family controls the business. The ownership is with the family. Recently a survey of the enterprises in India revealed that family owned small businesses have grown at a faster pace than the corporate large business houses. The internal factors that are psychological in nature can be classified as follows: Demographic Personal characteristics Social factors variables & Age > Technical expertise > Parental role models > Gender > Managerial > Cultural role models > Birth order expertise > Family support > Education > Entrepreneurial > Community > Ethnic expertise background > Leadership skills | > Nationality > Personal values Personality traits ‘Cultural factors Environmental factors > Need for] > Individualism 7] > Lack of employment achievement collectivism opportunities > Focus of| > Uncertainly > Little opportunity control avoidance for advancement > Risk taking > Materialism > Economic resources > Tolerance of| > Dynamism > Political climate ambiguity > Need for independence 14 Created with @ nitro” professional download the ree tral online a tropd.com/orofesionalExternal Factors In contrast to the intemal factors, the extemal factors lay outside in the environment and they influence the irfternal factors. They also, motivate and push a person to take decisions to become an entrepreneur. ‘The various external factors that influence an entrepreneur are given below: Political environment Social and cultural environment Economic environment Leal environment Technological environment spose Political environment The political environment influences govemment policies which in tum influence entrepreneurship. In our country, we have various regional political parties with different ideologies. At the centre, there is a coalition govem different States. Andhra Pradesh and Kammataka are able to promote entrepreneurship effectively and many new entrepreneurs are starting their venture there. Entrepreneurs will invest only where there is political stability. In case of an unstable government, the policies an programmes of the government keep changing, causing chaos and entrepreneurs will not be able to give their best due to the frequent changes in the government policies. Entrepreneurs try to influence politicians by lobbing to get support. Thus, the political influence works both ways. When there is political instability leading to uncertainty in the political environment, the growth of entrepreneurship suffers. On the other hand, such growth takes place when there is political stability as there will be not be any frequent changes in the policies and programmes of the government, Entrepreneurs would like to wait and Watch before they start their venture, This factors plays a very important role in of the growth of entrepreneurship. In addition, the growth of entrepreneurship has a major influence on Government policies. There is a very close relationship and dependency between these two factors. Social and Cultural Environment This factors is an extended version of family environment. Just as political and government Policies are interdependent, even family environment, social and cultural environment are closely related. The Hindu joint family system is part of the Indian culture. The system creates a bondage within the family, children have elders’ presence and guidance to grow with, There is discipline and respect for elders. It is like as small organization. The values of sharing, sacrifice and adjustment develop in a joint family. The eldest family member of the house is called a Karta. It promotes joint ownership, capital and decision making. However, there are some drawbacks and limitations to joint Hindu family system. A family may have members who ate 15 Crested with @® nitro” professional download the ree tral online a tropd.com/orofesionalentrepreneurial by nature and others who are risk averse. They may put a_block and may not allow the young members to develop. The case may also be reverse, a few people who are entrepreneurs will work hard and other non-enterprising individuals will also get the benefits because of joint ownership and capital. One will find community and caste system influencing the growth of business as well. Baniyas have been a dominant business community in India for centuries. The Jains, Gujarat is and Manwai businessmen can be seen in almost every part of not only the our country but all over the world. Similarly, in South India we have Shettys n Kamataka, Chattier in Tamilnadu and Komtis in Andhra Pradesh. Some communities are found in certain businesses. Gujarat is and Marwaris are engaged in manufacturing, banking and trading. In abroad, they identify the Patels with Motels, Patels belong to a Gujarati community who own Motels in USA in India, pawn brokers are usually from the Marwai community. Pawn brokers are money lenders who lend money against jewellery, property etc, Diamond industry, both export and domestic, is dominated by Jains from Palanpur. India has a long history and legacy and it is not easy to remove these socio cultural systems which have strong roots. The beliefs and practices are followed generation after generation. The social status counts a lot while making the choice of a career. In India, it is a fact that salaried persons enjoy better social status in society, besides enjoyed security of job, assured income, lesser working hours and fewer responsibilities. Even in the matrimonial market, preference is given to an employed person than an entrepreneur. Preference for salaried employment has gone to such an extent that educated unemployed youth are prepared to pay for obtaining a job than to utilize that amount of money for self-employment. All these are due to social environment, The socio-cultural environment and values have an important bearing in the emergence of entrepreneurship in any society. The value of orientation ta work, leisure, taking initiatives, being innovative etc, are some other aspects that are influenced by social environment. To become an entrepreneur, a person must have the willingness to work hard. But in our county, leisure orientation is more than work orientation. Preference for leisure than for work is a rule rather than an exception. A change in this orientation is necessary to bring about growth of entrepreneurship. ‘When entrepreneurs command a lot of respect and regard from the society, more people will be motivated to become entrepreneurs. So, if we want to develop entrepreneurship in our country, the entrepreneurship has to be given its due recognition. Once such a recognition is given by the society, more and more people would wish to become entrepreneurs. The social-cultural system is dependent on the educational system. For bringing any significant change in socio-cultural environment, the youth should be made aware of the importance of entrepreneurship in society. Socio-cultural values that needed for the growth of entrepreneurship and the concepts of entrepreneurship should become a part of the curriculum in schools, colleges 16 Created with ® nitro” professional download the ree tral online a tropd.com/orofesionaland universities. The educational institutions should emphasize more on the development of job creators rather than job seekers. Economic environment Economic environment pertains to the economic background of the individuals such as ‘Whether a person has ancestral property or property earned on his own. Details regarding current income, Standard of living and Financials status that he enjoys, etc. aepe They will influence the size of business and the capacity to take risks. These are micro level factors. Similarly, macro level factors such as, market structure, competition, profitability, investments availability of land, capital, labour, raw materials, market, etc., also have influence on entrepreneurship. The availability of excellent infrastructure also encourages entrepreneurship. Is the economic period in boom or depression? This also has a bearing on the growth of entrepreneurship. If the economy is in growth stage, then many would like to become entrepreneurs and vice-versa is depression. The capacity to take risks increases during the period of economic growth as the retum n investment is relatively high. Even an inefficient entrepreneur, may do well in a boom period, but in depression, only the efficient and capable business units with managerial capability will survive and grow. Legal Environment Businesses have to operate in a legal environment. There are laws, rules and regulations framed by various Acts under the constitution, which have to be followed by entrepreneurs. For example, if we want to start a shop, we have to register our firm under shops and establishments Act. The act has certain rules and regulations which specify that there should be a weekly holiday, child labour cannot be employed, lunch break should be provided etc. Labour inspections, appointed by the Government are empowered to visit any firm and verify various aspects pertaining to its functioning, If rules and regulations are not followed, the inspector will impose penalty, depending on the gravity of the violation of the rules. Entrepreneurs starting manufacturing units also have several laws governing their industrial establishments. For example, the Factories Act, 1948 makes it mandatory that if more than 20 persons are employed in a factory, proper drinking water and toilet facilities should be provided to them. Besides, we have sales tax and excise duty which have to be paid before goods leave a factory. There are central and state laws. For example, sales tax is levied both by central and state governments. And each state has its own rules and regulations. So, depending on the location of 17 Created w @ nitro” professional download the ree tral online a tropd.com/orofesionalan industry, an entrepreneur mist abide by the laws prevailing in the area where his industry is located. ‘We also have income Tax Act, Provident Fund Act and Employees State Insurance Scheme (ESI, each spelling out its own set of rules and guidelines to be followed by an entrepreneur, owning a factory. Fines are levied for noncompliance of any statutory requirement For example, under income tax aet, one has to file ‘annual return’ etc. ‘Also there are several laws protecting the interests of the workman, such as Minimum Wages Act 1948, Payment of Wages Act 1936, Payment of Bonus Act 1965, Trade Unions Act 1926, Workmen’s Compensation Act, 1923 and industrial Disputes Act 1947, So, lot of administrative work is involved in complying with the requirements of all such enactments. Lay off, Retrenchment and Closure Under chapter VB of the industrial disputes act, any industrial establishments employing 100 workers or more must obtain the prior approval of the appropriate government authorities for lay off, retrenchment and closure. However, the act is getting amended and will be applicable to industrial units employing 1,0000 or more workers, in India 80% country's 28 million workforce in organized sector fall in the category of less than 1000 workers. Also section 10 of the contract labour act does not permit companies to outsource labour for any acidity (for example security, canteen, gardening etc) Because of too many laws, small business entrepreneurs who generally run a one-man show, find it very difficult to cope up with the legal compliance and administrative work connected with various laws. Technological Environment ‘As discussed earlier in chapter, and in the new economy, technology is expected to play a more vital role than ever before. ‘The future is heavily weighted in favour of knowledge-based businesses. The new entrepreneurs must have knowledge about the latest technological developments and also should be able to predict the life of the technology. The life cycle of technologies is getting shorter. In the changing scenario, the importance of technology is increasing. Many o the entrepreneurs are hesitant to enter into businesses which are technology oriented. But the first generation entrepreneurs do not hesitate take up such technology oriented projects. Take the example of computers. Many of the traditional companies and entrepreneurs either die not either the fray due to lack of confidence and knowledge or were ill suited to the demands of the new technology. Government and Non-Government policies, programmes, incentives ‘The various schemes, incentives and support given by the government are the other major extemal factors having a strong impact on the entrepreneurship. If the policies and programmes of government are not attractive, it may serve as a negative influence. The recent spurt in the growth of IT industry has given a lot of encouragement and freedom so that many people wish to ‘go on their own, Venture capitalists extend a lost of support. Self employment schemes promoted by government and (NGOs) non Governmental Organization influence lots of youth to start on 18 Created witr @® nitro” professional download the ree tral online a tropd.com/orofesionaltheir own. The details of the support provided by government and non-government organizations will be discussed in the next chapter. These benefits can induce and motivate entrepreneurs. For example, liberal sales tax and excise duty concessions will encourage more people to become entrepreneur. The policies and programmes should have consistency will and plan to achieve certain targets. To be effective, instead of the same programmes and policies for all entrepreneurs, irrespective of the type, programmes should be tailor-made for each type of entrepreneurship. All the factors discussed above are not independent; in fact there is lot of interaction between them. For example, government policies, political environment, legal environment are interconnected. Similarly family, social and cultural, psychological economics factors have close relationship with one another. Entrepreneurship is not influenced by a single factor but by a combination of these environmental factors. For some entrepreneurs, a few factors may influence while for others some it will be some other factors. For example, an entrepreneur may start a business because of the opportunities provided in the form of concessions, and incentives while some other person may want to be his own boss by starting an industry on his own. First set of factors in the examples cited above are mainly economic while the latter are non-economic reasons. These factors may act as motivators and influence the entrepreneur to start and continue a business or act as a barrier and prevent the entry or withdrawal from a business. Barriers to Entrepreneurship Negative factors only serve as barriers preventing individuals to become entrepreneurs. A recent global entrepreneurship monitor (GEM) study conducted in 2001 by the Indian Institute of Management, Bangalore found that the ‘fear of failure’ inhibits entrepreneurship in Indian with 27.8% of the respondents,. Whereas in Korea, it is the highest 64% and in Spain it is the lowest it is only 3%. ‘The study also identified factors such as lukewarm attitude towards entrepreneurship, lack of physical infrastructure and outdated policies and programmes, inhibited, entrepreneurship in out country. Karal M. Vesper identified lack of technical skill, managerial skill, seed capital business know- how, motivation, monopoly, protectionism, patents, social stigma and competency as factors responsible for barriers to entrepreneurship. Risk and uncertainty, paradoxes and contradiction, market imperfections and asymmetries and vacuums are the rules rather than the exceptions. Consequently, business includes confusion, chaotic change, turbulent markets, technology and availability of resources. The three primary driving forces a. Founders b. Opportunity recognition; and 19 Created with ® nitro professional download the ree tral online a tropd.com/orofesional©. Resources requirement have to be assessed and the best fit has to be obtained of the lead entrepreneur, the management team with the opportunity. In tum, the lead entrepreneur, the management team and the opportunity must fit with the ability to Marshall and control the resources. The diagram given below explains the real world business environment and the entrepreneurial process. Paradoxes and contradictions Risk and Uncertainly The Founders Ayoreos: somosex pure snydins Aunpoddo Attitudes Motivation Commitment Management ‘Competencies Opportunity Recognition Forgiving Enduring Rewarding Asymmetries Chaos, confusion, in knowledge turbulence I markets, awareness, and technology, and resources FIT versus GAPS information Resource Requirements Marshall Minimize Control Deal Structure Capital market context Created w @® nitro” professional download the ree tral online a tropd.com/orofesional‘The diagram show how the interaction of the environmental factors influences the real-world business environment that lacks certainty, predictability, stability and smoothness. ‘Types of Ownership Private sector, a business may be owned singly by an individual or jointly by a group of individuals. The ownership provides an individual or a group of individuals with the legal title to business assets, the authority to control a business operation and also the right to enjoy profits eamed. An enterprise owned by a single private individual is called sole proprietorship or individual proprietorship business. All other types of ownership in private sector are owned by groups of individuals. The group ownership is noticeable in a Hindu joint family business, partnership, cooperative or joint stock company. Besides, a business undertaking completely owned by the state, i.e., goverment, is commonly known as a government enterprise or public sector undertaking. A business with joint participation by both private businesspersons as well as government is what we call a joint-sector enterprise. Table will present a brief overview of the chief forms of the business ownership in private sector. Some of the key features of different forms of business ownership in private sector are discussed in the following paragraphs Sole Prop: torship Proprietary establishments are the most common form of privately owned and managed business ventures. The sole proprietor invests own and borrowed funds and uses own skills and abilities in the management of affairs of his/her firm. The proprietor is the only person who has the legal ight or exclusive title of all the assets of his/her business and is solely responsible for its operation. Except for the trade licence and similar minor requirements, normally, no other major egal formalities are necessary to either start or shut down a proprietorship firm. In case a proprietor decides to withdraw from all business activities and in the event of they're being none to succeed him/her, more often the business is sold to someone or closed. However, some other basic characteristics of this of enterprise are: Advantages Easy to start or close Negligibie restrictions Owner's exclusive control Immediate decision and speedy action Direct supervision of employees Direct dealings with customers Flexibility of operation owner enjoys all the profits a Created with @ nitro” professional download the ree tral online a tropd.com/orofesionalLimitations Inadequacy of resources Limited manpower Owner’s unlimited liability Dearth of managerial skills © Excessive burden on owner Growth and stability of business depend on owner's health, initiative, business acumen and innovational mentality. Family Business ‘The expression “Family Business” denotes a particular type of commercial enterprise that is ‘owned, directly managed and financed by single individuals usually the family heads. ‘The ‘owner, also known as proprietor, accepts all risks and responsibilities and operates his/her business, often with the assistance of some other members of the family. The success and survival of a venture of this kind depend entirely of its owner-operator’s capability and intelligence in practical business matters. Family business firms may be broadly classified into three groups according to their function, namely: () manufacturing or production units; (ii) trading units; and (iii) service units. Cottage or tiny manufacturing units are mostly home-based and these are generally owned and managed by traditional artisans, craftsmen or specially trained individuals. These are engaged in making, among numerous other things, usefull and valuable articles like furniture, handicrafts, pottery, brassware, gold and silver omaments, dairy and farm products, fruit juice, jam and jelly, pickles, agarbattis and so on. Many are involved in service related and / or trading activities supplying houschold and personal requirements of local consumers. Notable among these are pharmacists and pathologists, booksellers and stationers, wholesalers, grocers, retailers, confectioners, restaurateurs, tailors, photographers, electricians, electronic goods repairers, interior designers and job printers etc. again, there are small firms tat either manufacture minor components for large industries or provide industry-related service. A great majority of family businesses are a sort of proprietorship ventures and these are run on a tiny or small scale. These, in reality, do not have much scope for growth or expansion mainly due to the very nature of business. Other causes include: dearth or finance, space, skilled manpower, specialized technical education, managerial skills and, above all, absence of ambition to proper on the part of most owners, However, due to old age or death or owner-operators, many family businesses are often closed sown or sold to other. 22 Created with @ nitro” professional download the ree tral online a tropd.com/orofesionalHindu Joint Family Business This form of business is found only among the Hindu joint families in India. Under Dayabhaga system of inheritance, which prevalent in West Bengal, Assam and Orissa, following the death of the father, the members of his farnily inherit his business along with other property. It is only after the death of the father that his inheritors will acquire legal title to the ownership of his business. Under the Mitakshara system, which operates in other Indian states, a Hindu family's any of the three successive generations in the male line can simultaneously inherit the ancestral property and business from the day he is bom. The joint family property is known as coparcenaries property and the joint owners are coparceners. This inheritance right is enforceable by the principle of survivorship, that is as long as one is alive. Other basic features of this system are: business is managed by “Karta”, head of the family; rest of the family members are not entitled to take part in the management of the business; business in not dissolve by the death of any member; the liability of “Karta” is unlimited, but that of every other member is limited to the extent of the value of one’s interest. Advantages ‘Male family members are assured of some income from business; Opportunity for all to gain business experience; Business not to be dissolved due to death or insolvency of any member; Continuity of business; Membership of business without any formality or payment of fees; Limited liability for all except “Karta”, Minor members cannot be adjudged as insolvents. Registration not compulsory, Limitations ‘* Only “Karta:” is privileged to head the management of business. * Unless a member severs connection with family business, he cannot question the authority and decision of “Karta”, © One severing connection with business cannot ask for accounts of past profits and losses. Partnership Partnership is a business” relation between two or more persons who have agreed to share the profits of a business carried out by all or any one of them acting for all.” In simple words, when by means of a contractual agreement several individuals associate with common ownership and management of a venture, such a business relationship is termed as partnership. In India all aspects of partnership business are governed by the provisions under the Indian partnership Act 1932. a partnership venture can be set up with minimum 2 and maximum 10 members in banking 23 Created w @ nitro” professional download the ree tral online a tropd.com/orofesionalbusiness and 20 in other cases. This restriction on upper limit is due to the provision contained under section 11 of the Indian companies act 1956, which stipulates that an unregistered company, association or partnership having more than 20 members (10 in case of banking) must be registered under the said Indian companies Act. ‘Some of the significant features of partnership are; ‘The primary objective of partnership is to share profits(or losses). Arelation without profit motive is not regarded as partnership. ‘A minor person not being legally competent to enter into a contract cannot become a partner in a partnership firm. «A joint Hindu family business or a business set up by a father and his son only cannot be treated as partnership. © A partnership venture must be managed by all partners or by anyone among them acting for all. ‘Types of partnership Partnership is broadly classified in two groups. General or ordinary, and Limited partnership. General partnership is again divided into two subgroups namely. Partnership-at-will, and Joint venture or particular partnership. General or ordinary partnership refers to an arrangement, which makes all the partners jointly and severally responsible for all the debts and liabilities of a business. Simply, defined, all partners will have to bear the risks of unlimited liabilities. In limited partnership; + There must be one or more general partners where liabilities for all debts and obligations of the firm shall remain unlimited and © There must also be one or more limited (also known as special) partners who will be liable for an amount to the extent of one’s capital contribution. However, limited partnership is not permissible in India. artnership-at-will refers to a business formed for an indefinite period, i.e., without any specific agreement about the continuance of partnership. Partnership-at-will can be dissolved at any time as and when a notice to that effect is served by a partner. Particular partnership, also known as joint venture, is formed for a very specific venture or period and it comes to an end as soon as the specific. Purpose or period is over. 24 Crested w @ nitro” professional download the ree tral online a tropd.com/orofesional‘Types in Partners In partnership, every partner is entitled to take equal part in the management of business. In reality, this rarely happens, instead they assume different roles that are mutually determines and categorically stated I the contractual agreement. And this is done in terms of one’s expertise, experience and keenness in a practical matter. Commonest and the most widely favoured types of partners are discussed hereunder. Active or General Partners Active or general partners are those who actively participate iin the management of a business. This is how they are also known in the trading community and to the general public. Secret partners, active or general, can take active part in the management, but they do so secretly, that is without the knowledge of the people not belonging to the same business, Sleeping or Dormant Sleeping or dormant partners are those who do not take part in the management and their ‘entities are not known to general public. Even if their identities are known to others, sleeping oF dormant partners are also at items called silent partners. Working partners do.not invest any capital but they hold key positions and, in most cases, they are admitted in recognition of their business acumen, knowledge and capability in any particular field. Quasi or Ostensible partners are those who have already retired from active participation but whose investment in the same business is still retained as loan capital and against which they get some return, Holding out Partners denote those persons who without being real partners hold out, that is to say they represent themselves, to general public as if partners and conceal their true identities. As a consequence, such persons will be liable for any partnership debts arising out of their actions payable to outsiders. Deed of partnership In the event of disagreement occurring in future among partners, for proper adjudication of disputes, it is the normal practice that the terms and conditions as agreed upon by partners are ‘written in detail. The facts of the agreement are written down clearly narrating the relevant terms and conditions. This is known as deed of partnership and it is duly executed and legally binding on all partners. According to the Indian partnership act 1932, it is mandatory to have partnership deed. The particulars that are of major significance and incorporated in a partnership deed relate to: * Name and address of the firm; © Nature of business and its duration, if any; © Names and addresses or partners; 25 Created-w ® nitro” professional download the ree tral online a tropd.com/orofesional© Investment, in cash or kind, by each partner and the manner and timing of such investment; Provision for additional capital, if required in future; Operation of bank account, maintenance of financial accounts and conduct of audit; Sharing of profit or loss (generally both shared in the same ratio); Salaries, interests and commissions, if any payable to partners; ‘Amount each partner can draw from business each month or year and interest, if any, payable y one for such drawing; Management of business and status of each partner; Duties and responsibilities of each partner, Limit on the action each partner will exercise without the consent of others; Criteria for introduction and expulsion of partners; Procedure to deal fairly with any partner to be expelled; Conduct of arbitration of future disputes, both major and minor issues Causes for dissolution and methods of settlement of accounts; and Rights of remaining partners to buy in shares of a retiring partner. were cece Registration of Partnership Registration of a general or ordinary partnership firm is not legally mandatory. Nevertheless, for a firm and / or its partners to enjoy the privileges as conferred on them under the provisions of the Indian partnership act 1932, it is desirable that a partnership business is duly registered with the Registrar of firms. An unregistered firm cannot enforce in any court of law its claim against any third party for recovering any amount exceeding Rs. 100 and moreover its partners cannot seck any legal relief and remedy arising out of any dispute against the firm or any of the co-partners. For registration of firm the particulars to be furnished to the registrar include name and address of the firm, nature of business, particulars of its other branches; names and addresses of its partners and their joining dates; and the date when the firm should also be intimated to the registrar from time to time. However, although limited partnership is now allowed in India, in most of the countries where this form of business is permissible, a limited partnership firm must be registered , otherwise it will be treated as an ordinary partnership business. Advantages ‘Not much of statutory formalities are involved for setting up a unit; Partners mobilize own resources and thus facilitate inflow of required funds; More manpower and expertise add to organizational efficiency; Partners take personal attention for better management and profitability; Partners’ watchfulness ensures proper supervision of workers, higher productivity and better service to customers; 26 Created with @® nitro” professional download the ree tral online a tropd.com/orofesional* Units having sound financial position may secure loans from financial institutions; * _ Itis possible to take quick actions as the circumstances will demand; Limitations Every partner is liable for business debts to an unlimited extent;; Alll partners will be held responsible for mistake or misdeeds committed by any one of them; * Death, retirement or insolvency of a partner, or any on desiring to quite will result in the dissolution of business. * Disagreement or lack of cooperation among partners, or dishonesty of anyone may disturb the very existence of the business; © Ownership right is not freely transferable because a partner cannot sell his / her share without the consent of others. Cooperative A cooperative society is a voluntary association of ten or more individuals, who come together for the benefit of their common economic interests. A cooperative is a joint enterprise where all the members contribute capital and labour and also manage its affairs with an understanding to primarily distribute among themselves equally the profits earned or benefits derived out of that venture. At least ten individuals are required to form a cooperative society, there being no restriction on the upper limit of the members. Like in West Bengal, cooperative societies are formed, registered and governed in terms of the provisions of the cooperative societies act and Tules as enacted in other states. Areas of Cooperative Operation The cooperative form of enterprise owes its origin to the cooperative movement, based on the concept of cooperation, set to work in the early last century. The principle objective was to help and encourage the weaker and exploited sections of the society to organize themselves and work for their own economic upliftment. The scope of cooperation has since enlarged and the methodology of cooperative operation has undergone a sea change. Cooperative activities are now widely practiced in various areas of economic life. According to the nature of their functions and objectives, some of the major areas of cooperative operation are summarized as follow: Industrial or producers’ cooperatives are organised and managed by small producers who Join hands to effectively meet the competition from large manufacturers. The basic objective is 27 Created-w ® nitro” professional download the ree tral online a tropd.com/orofesionalto provide individual producer members with necessary raw materials, equipment and finance and also help market their products at affordable prices and gain reasonable profits. Agricultural cooperatives are formed by framers to obtain necessary inputs and assistance (seeds, fertilizers, implements, warehousing facilities and finance etc) for production as well as marketing purpose. Consumers’ or Retail cooperative are set up to directly procure from manufacturers various essential consumer goods and distribute them among the members at prices much cheaper than those prevailing in the market, thus eliminating the presence of middlemen who generally make substantial profits from the resale of commodities. Credit Cooperatives are formed to collect and accumulate members’ own small savings that they distribute among members, requiring immediate financial aid, as loans. This loans thus arranged not only help members meet their urgent needs but also allow them to repay at concessional interest and on affordable terms of security and repayment. Handloom Weavers” Cooperatives have been set up in almost all the states in India under the administrative control of the respective state governments. Sponsored and financially aided by the government and having their own marketing networks all over the country, these organizations operate mainly to market varied products woven manually as also on power- operated looms by individual weavers lacking much of material possessions. Some of these cooperative also supply yams to resource less weavers and accept the finished goods paying them the making charges. The facilities are generally extended to individual weavers enrolled as members with the concemed units. Service Coperativé aic'run with a view to rendering varied scrvice facilities to own members at no-profit-no-loss basis. The facilities include, such services as may be necessary for sustenance or support, for instance, housing accommodation, health care, hospitalization, transportation, cold storage, repair and maintenance and so on. Advantages It is relatively easy and simple to form and establish. Ordinarily talented individuals lacking much of material possessions may benefit by becoming its member. Liabilities of each member is limited to the extent of one’s investment in it. Retirement, death or insolvency of any member does not in any way affect its continuity. Itis managed by a committee directly elected by its members. Members are entitled to get quality goods or services at fair prices, or loans at concessional interests and on affordable terms'of security and repayment. 28 Created with @ nitro” professional download the ree tral online a tropd.com/orofesional* Generally members render voluntary services for daily operation and as a result its productivity may be better and establishment expenses much less. * Wasteful expenses on marketing and advertising may be effectively controlled and consequently better earnings may be possible. Unnecessary accumulation of inventory and wastage of goods may be avoided. Shares held by members are easily transferable, Members are assured of prompt marketability of their products affording quick and reasonable returns. Money less members are freed from being exploited by middlemen and financers. Assistance from government may be available, Limitations * Generally people having technical skills or managerial expertise are not admitted as ‘members or appointed as employees. * Want of skilled personnel or absence of coordination among members adversely affect operational efficiency. * Normally, talented people belonging to underprivileged class do not get admission as members. * Groupism, rivalry and mismanagement by vested interests often lead to ineffectiveness or closure of a unit. Joint Stock Company A joint stock company, popularly called limited company, is an association of many individuals, who contribute to a common capital to conduct a business for gain. The common capital is divided into equal parts, each of a certain fixed uniform value, known as shares and the inviduals so contributing are members commonly known as shareholders. The shares can be sold and transferred freely and the liability of a shareholder is limifed to the extent of total fixed face value of one’s shareholding. Section 3, of the Indian companies act 1956, however, denotes a company as “a company formed and registered under this Act, and that “an existing company means a company formed and registered under any of the previous company laws”. In India, all matters concerning formation, registration and operation of joint stock companies are governed under the Indian companies act 1956. Important Features * A joint stock company has a separate and independent legal entity as if an artificial person. 29 Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesionaleee Its existence continues indefinitely so much so that is not to be dissolved due to the retirement, death or insolvency or any member. Any of its shareholders can freely sell and transfer own shares without the consent of others. Its management is controlled y a board of Directors elected by and from among shareholders. lis shareholders have no right to participate in the general conduct and management of business and affairs of the company. Ithas rights to acquire and transfer property in its own name. Itcan sue others and be sued by others in its own name, It can admit equity as well as preference shareholders, Preference shareholders will have preferential rights to profits and also to refund to capital, in the event of its dissolution, but will not have any voting right. The right of equality shareholders to profits and refund of capital will come next to that of preference shareholders, but they will have the voting rights. It can take up any risky venture, because its liability is limited to the aggregate face value of its total number of shares, Its shareholders are not responsible for the acts of the company. Advantages eee ee eee Liability of every shareholder is limited. Shares are transferable freely. Continuity of existence is certain. Sufficient capital is obtainable, ‘Technical and managerial experts may be employed. Advance technology may be introduced to improve operational efficiency. Risky ventures having higher profit possibilities may be undertaken. Significant economies of large scale production is achievable, Limitations eee eoe Burdensome procedure to be completed for formation and registration. ‘Numerous statutory requirements make the operation difficulty and expensive. Few shareholders control the management and enjoy most of the benefits. Majority of shareholders do not have any control over the general conduct of business. Large workforce, confrontation with management and labour unrest become unavoidable. Dishonest persons tend to defraud smali investors by promoting false companies, causing liquidation of companies or manipulating market prices of shares. 30 Created with ® nitro” professional download the ree tral online a tropd.com/orofesionalNature of Limited Liability On the basis of the nature of limited, companies are classified into two groups with less resemblances: a. those having liability limited by guarantee and b. the rest having liability limited by shares. Furthermore, a company having its liability limited by shares can operate as a private limited company of a public limited company. Brief details of these types are being discussed hereunder. Company limited by guarantee: The liability of a company of his type will be limited to the aggregate amount guaranteed to be paid by its members. Its members do not contribute any money as capital, but undertake to meet the company’s debts and liabilities, in case it is would up, to such predetermined amounts payable, usually equally, by each of them as declared in the company’s Memorandum of Association. Organizations registered under this category are not required to use the words “Private Limited” or “Limited” with their names. ‘As provided under section 25 of the companies Act 1956, non-commercial organizations engaged in promoting trade, sports, scientific, artistic and cultural activities are generally registered as companies limited by guarantee. These include chambers of commerce, traders’ associations, manufacturers’ associations, exporters’ associations, clubs, research centre and so on. A company limited by guarantee, also known as a grantee company, cannot engage any itself in any activity on a business basis for profit. However, in ese there is any excess of income over expenditure, the same cannot be distributed amont the guarantor-members but will have to be utilized for advancement of the organization’s objectives. Private limited company: a company having its liability limited by shares can be formed as a private limited company and this means that: It cannot openly invite the general public to subscribe to its shares; The number of its shareholders must not be either less than two or more than fifty; The rights of its shareholders to transfer shares are restricted; company’s name. A unit to operate essentially for profit cannot be registered as a guarantee company. Public limited company: an enterprise having its liability limited by shares can also be set up as a public limited company and for which the essential conditions include: + Itwill have at least seven and a maximum of any number of shareholders * Members of the general public may be invited to subscribe to its shares, debentures and bonds; Shareholders will have the right to sell and transfer freely their shares to anyone; and The word “Limited” must be used after the name of the company. Various exemptions and limitations on the private limited and public limited companies have been cited in Table. 31 Created-w @ nitro” professional download the ree tral online a tropd.com/orofesionalExemptions and Restrictions S.No Regarding Private limited company | Public limited company 1 | Number of sharcholders Minimum 2 and maximum | Minimum 7 and maximum 50 any number 2 [Invitation to general public for | Not permissible Permissible subscription to shares 3 [Financial assistance to help an | Not permissible Permissible intending investor _—_ purchase company’s own shares 4__| Transferability of shares Restricted No restricted 3 | Minimum number of directors to be | Two Three appointed 6 | Increase in number of directors Permissible without prior | Permissible only with approval of department of | prior approval of company affairs, Govt. of | department of company India. affairs, Govt. of India. 7 [Director's age, appointment, | Approval not necessary | Approval by department reappointment, remuneration and of company affairs, Govt. amenities. of India necessary. & [Director's eligibility and consent | Particulars need not be | Particulars mist be filed about purchase of stipulated filed with registrar of| with registrar of minimum number of shares. companies, Govt.of India. | companies, govt of India. 9 | Commencement of business ‘After obtaining certificate | After obtaining certificate of incorporation | for commencement of (registration) business, which is granted only after __ stipulated minimum number of, shares have been subscribed. 10 | Statutory report and statutory | Not legally binding Both legally binding meeting Ti | Managerial remuneration No restriction Must bot exceed 11% of net profit; in case of inadequate profit, to be decided by department of company affairs, G.O.1. 12 | Quorum Generally two members, | Generally five members, unless otherwise stipulated | unless otherwise stipulated in the articles in the Articles. 13 | Filing of profit and loss account with | Not essential Essential registrar of companies 2 Crested with @® nitro” professional download the ree tral online a tropd.com/orofesionalChoosing the form of Ownership The task to convert an innovatory idea into 2 commercial entity calls for certain fundamental decisions. These include selection of the suitable form of ownership for the proposed venture, For a business involving comparatively little investment and, to be run on a tiny scale, sole proprietorship or partnership should be the appropriate choice. In a proprietary concern, under normal conditions, the owner-operator does not have to put in extraordinary efforts for funds. In partnership, generally the partners themselves collectively bring together own resource and thereby facilitate availability of required capital. Additionally, borrowed capital may be available from extemal sources, though more often the cost of borrowing funds could be prohibitive. Where though more often capital requirement is neither too little nor too much and, in such a case an enterprise must essentially be on a small to moderate scale, it becomes necessary to make more people interested in the proposed project, that is to say invite others to invest. In proprietorship or partnership, investors cannot avoid the burden of unlimited liability; but such a problem does not arise in a limited liability set-up. The benefit of limited liability, apart from other advantages, is that it makes investment in company form of business more inviting to investors. Put simply, many people will be willing to make equity (ownership) investment in a limited liability company. In possession of the requisite resources Viz., men, money, materials, machinery as also technical managerial skills limited liability form of business holds immense scope to grow. Again, as competed with a public limited company, a private limited company is allowed a number of exemptions as regards regulatory measures. Further, in a private limited company the investors being few and closely connected by common interest stand the chance of controlling the management. Therefore, with regard to small business entrepreneurship and from the standpoint of both entrepreneurs and equity investors, ownership in the form of private limited company is the best adaptable. Nevertheless, in determining the right form of ownership, other than the size of business and capital requirement, the issues that require through consideration are quite few and varied. Notable among these are: 33 Createdw @ nitro” professional download the ree tral online a tropd.com/orofesional‘Nature of business; Minimum output to achieve economies of production; Minimum tumover to make business commercially visible; Specialized and skilled personnel needed; Capital requirement Return on investment Franchise The English word franchise has been derived from the French word ‘franchir’ meaning to free. Literally, franchise denotes special privilege or right, free from certain restrictions; granted to an individual or group. In recent times, the word franchise has come into familiar use to signify a privilege granted by a principal allowing its one or more agents to sell or provide its products or services and for that purpose use its name, trademark and sales promotional facilities. In short, franchise implies a contractual arrangement between a principal and its agent or agents for mutual benefits from a business established by the principal n exchange for certain payments. In franchise system, a principal (usually an individual or an enterprise) is commonly known as a franchiser or licensor and its agent (also an individual or an enterprise) as a franchisee or licensee. Scope Business under franchise scheme may cover virtually any commodity or service. Some of the notable examples, as one may find more often nowadays, are confectioneries and edible items, readymade garments, forswear; homeopathic and biochemic medicines; home appliances, radio, television, and other electronic devices; computers and accessories computer training programmes; general, technical or vocational education and training; selling or servicing of passenger or commercial vehicles; machinery and equipment or facilities for diagnosis or treatment, courier services and so on, Importance Features Extent of loan finance likely from external sources; Liability of investors Number of individuals interested in equity (ownership) investment; Facility of formation and registration, and related expenses; equity (ownership) * Tax burden and concessions; * Grants and subsidies from government; Control over management. Franchisor plays the role of entrepreneur, starts a new venture in the face of competition, undertakes business in lie with own innovatory idea and explores untapped market opportunity 34 Created with @ nitro” professional download the ree tral online a tropd.com/orofesional* Franchisor requires that every would-be franchisee must have a. The requisite funds for non-refundable license (entry) fee and refundable security deposit, both payable to Franchisor to start; with b. The capability to arrange for own use the necessary business accommodation, manpower, office equipment and furniture; and ¢. The will and determination to achieve high business turnover. © Franchisee is appointed for a specified location keeping in view the business possibility that can be developed in that area, Reputable Franchisor attracts customers because of the general belief that the quality of the products or services belonging to a well-known name would be as good as that of similar products or services bearing the same name marketed elsewhere and for which one does not have to travel to far away places, * Franchisor usually provides franchisee with necessary expertise, implements, materials as well as sales promotional supports. * Franchisee mobilizes resources for a. Payment of initial license entry fee and refundable security deposit; and b. Own business accommodation, staff, office furniture and equipment * Franchisee managers own affairs with full autonomy, selling or providing franchisor’s produce or services’ and assumes all risks generally associated with any business. * Franchisee pays from time to time a predetermined share of the profit, termed as royalty, to franchisor. © Franchisee’s success is very much dependent of franchisor’s business integrity and above all customers’ confidence in franchisor’s products or services. Advantages for Franchisee Participation in an already stable business established by franchisor. Net income may be more than that from a salaried job. Assistance from financial institutions is likely. Making the products or services attractive to customers is the responsibility of the franchisor. Independent operation with full autonomy. Opportunity to benefit from new products or services from same franchisor. Sales promotional measures and centralized publicity by franchisor. 35 Created with @® nitro” professional download the ree tral online a tropd.com/orofesionalLimitations Exceeding high initial payments on account of license (entry) fee and security deposit, Substantial block capital needed for own business accommodation, office decoration, furniture and equipment ete. Sizable amount of working capital required for staff and day-to-day operation, Sharing of cost of extravagant centralized publicity sponsored b franchisor. ‘Uncertainty of adequate return on investment in the long run, Success will depend on the reputation of franchisor and sustenance of quality of products or services. Considerable portion of the profit payable to franchisor. Franchisor imposes conditions demanding more favourable terms. Risk of dishonest franchisor taking over business of an unwatchful franchisee. Probability of being deceived by false promises of franchisor. Corporate Entrepreneurship The expression ‘Corporate Entrepreneurship” is a relatively new coinage. If refers to an intense entrepreneurial culture in corporate set-up or joint stock company where special emphasis is placed on systematic innovatory activities financed by the company and undertaken as a continuing process by several individuals specifically engaged for that purpose, In a corporate entrepreneurship, salaried employees, supported with organizational resources, carry out activities for achievement of innovations as an ongoing process. By contrast, in a sole proprietorship establishment, it is the proprietor or owner who uses own sklls and abilities, as also own or borrowed resources, in the management of innovatory affairs of his/her venture. According to the popular perception, the concept of entrepreneurship is broadly applicable to small businesses. But recent studies in the USA reveal, says author James RGolden, that smail firms with their flexibility and large companies with their large scale economies have been more innovative than medium-sized firms. Many suggest that the concept entrepreneurship is relevant more to large corporate organizations than small firms. In modern economy, marked by the dominance of capitalism, the nature of entrepreneurship is noticeably different from what has been described in Schumpeterian model that an individual who as the innovator and owner-operator undertakes new combination of the factors of production is the entrepreneur. In today’s business environment, as some people claim, individual entrepreneurial spirit, willpower and ability have become some what insignificant, rather less effectual. Joint stock companies spend huge amounts on research and development, invent new technologies and develop large-scale innovations for new products or services. Large corporate houses, employing persons having managerial specialization, recognize unmet market need and wants and act 36 Created with @® nitro professional download the ree tral online a tropd.com/orofesionalquickly to exploit profit opportunities that escape the notice of individual entrepreneurs or small firs. Accordingly, the process of innovation and factors creation, which adds to the productive growth and competitive strength of an enterprise, has become a routine function is large businesses. This is because large companies better equipped with ample financial resources, managerial skills and creative talents, can take advantage of economies of large-scale production, apportionment of high research and development costs over larger volume of production; access to foreign technological know-how; joint collaboration; import of capital goods; component and basic raw materials; vast marketing and distributions network; and mass publicity campaign through print and electronic media. However, many others differ on the concept of corporate entrepreneurship. Critics claim that the word ‘entrepreneurship’ has not been clearly defined and that the functions of corporate employees engaged for set purposes cannot ever be sharply outlines. In their opinion, the fundamental elements of entrepreneurial action in the very real sense do not exist in routine research and development work conducted jointly by salaried employees with the backing of company resources. More precisely, there is no involvement of individual owner-operator and the entrepreneurial zeal characteristics of the entrepreneur, who would perceive market ‘opportunities, conceiving new ideas, draw up plans and strategies take initiative, arrange required resources and assume risks and personal responsibilities. Further, it is unlikely that talented persons, having the qualities of creative frame of mind and ability to master requisite resources, would continue to remind employed by someone for fixed remuneration. In large firms, persons of talent hardly ever get adequate rewards, recognition or encouragement to pursue own ideas. These people are reluctant to take any initiative on their own as more often they are required to execute the policy decisions and directives of top executives, who tend to be primarily concerned with maximizing profit and safeguarding the interest of investors. The employees do not face uncertainties in business, nor do they in any way risk their own money and fortune. In a large corporate business, keen proprietary interest or particularly the likeness of the role played by the owner-operator entrepreneur, who starts and manages own venture with utmost care, is noticeably absent. The salaried employees do not look after the interest of huge number of shareholders. The few who control the management supply a minor portion of the capital invested. By comparison, the vast majority of the small investors who obviously supply the maximum of there permanent capital don not and cannot take part in active management and thus have noting to do with the day-to-day business operation. But they bear the risks of their own money and fortune, through negligible and limited to the face value of the shares they own individually. The large number of small shareholders, known as owners through in paper only, are regarded more as ordinary investors than owners. In short, therefore, the small shareholders cannot be treated on par with entrepreneurs. 37 Created with @ nitro” professional download the ree tral online a tropd.com/orofesionalAgain, these days, only a very small portion of corporate capital is raised through equity financing, while and impressively large portion of its comes from self-financing or ploughing back of profit, secured and unsecured loans, sale of debentures or bonds, public deposits and so ‘on. Companies consistently making good profits year after retain a large part of their earnings every year that they sue for internal financing, hence the absence of proprietor or shareholders’ roles and, more importantly, proprietary interest in corporate entrepreneurship. Intrapreneurship In a corporate set-up, since the continuing process of research and development is carried out jointly by several persons. It is often not possible to give credit to a single individual for the result achieved. The work for nay technological break through or innovation, therefore, in a large corporate house is attributable to a team comprising several talented peons. Thus, in essence the entreprencurial functions occurring in a large organizational set-up actually or potentially involve collective or joint (corporate) efforts and hence there term “Corporate Entrepreneurship”. Again, as their expression describes the process of entrepreneurial events taking place within (intra) an already well established organization, it is called “Intra-Corporate Entrepreneurship” or more briefly in a word “Intrapreneurship”. And the employee engaged specially in the task of successive innovatory activities in a large corporate set-up is described as the “Intrapreneurship”. ‘Nevertheless, some authors continue to suggest that the terms entrepreneurship and corporate entrepreneurship or Intrapreneurship are distinctly different conceptually and functionally. Intrapreneur The term intrapreneur refers to that particular person who as someone's employee performs that tasks of innovations within (intra) an existing organizational set-up. Simply said, a corporate manager playing the role or corporate entrepreneur is often called the intrapreneur. ‘Thus what is significantly common between an intrapreneur and an entrepreneur is that both act, as change agents and thereby contribute to material growth in socio-economic development. Large business houses very frequently employ persons having creative frame on mind to work specially for innovations and technological up gradation that help generate higher opportunities. Intrapreneur, like entrepreneurs, apply their intellectual abilities and powers to conceive new ideas. And large corporate organizations translate such ideas into new products, production methods, devices or services and thereby take advantage of the potential market demands. Individual entrepreneurs pursue the acts of creativity and innovation for the benefit of ‘own business interest. These are the people who perceive market needs, conceive new ideas, take initiatives, assume personal risks and responsibilities, mobilize resources and turn own dreams into profitable business enterprises exclusively for self-sustenance without dependence on 38 as @ nitro” professional download the ree tral online a tropd.com/orofesionalothers. In short, entrepreneurs pursue their cherished ideas, manager their businesses independently and personally risk their own fiancé and future. Contrarily, intrapreneurs continuously carry out routine tasks for successive innovations for the benefit of their employers. They work under the bureaucratic environment in line with the established practices or the policy guidelines as prescribed by their superiors. These individuals generally do not have the freedom to apply own discretion and are reluctant to pursue own thoughts independently. They do not take any initiative for implementation of any change as they are apprehensive of being rebuked or ridiculed for any oversight of fault, In short, intrapreneurs do not extent themselves as aggressively as entrepreneurs would do, nor do they take any personal stake in making their ideas succeed commercially. Obviously, being salaried employees, they do not bear any of the risks and responsibilities that are normally associated with any business. While many authors do recognize the difference between the terms intrapreneur and entrepreneur, some do not see these expressions as being different; they take the term entrepreneur in its widest sense. In their work entitled “Essentials of Management” (1998) , authors Harold Koontz and Heinz Weihrich write categorically that “the term ‘entrepreneur’ designates an enterprising person working either within or outside the organization. Intrapreneur Finally, few people having yet another line of thought tend to use the newly coined term intrapreneur to refer to the person who runs a new division, subsidiary or a new company entirely owned and controlled by a large company to produce and / or trade in newly innovated goods or services, The concept of corporate entrepreneurship is sought to be justified by the fact that several talented persons work jointly and concertedly not only to bring forth something, new but also to ensure commercial success of their innovations. Unless and until industrial inventions or innovations are adopted for commercial use, those will not have any economic significance. Large firms have much superior marketing tools to commercialize new things that their employees innovate in steady rapid succession as a response to changing market needs. S the result, business operations are expanded leading to the creation of new division or subsidiaries to facilitate production and / or marketing of new products or services. The units, thus, created are wholly financed and controlled by large companies. And the person engaged in leading and ‘managing organizational affairs of such a subsidiary unit or division is nowadays called as the Intrapreneur. 39 Crested-w ® nitro” professional download the ree tral online a tropd.com/orofesionalGovernment policy for small-scale enterprises Learning objectives ‘On completion of this chapter, you should be able to: % Discuss the government policy towards developing and promoting small-scale enterprises in the country. *% Give an account of the government support to small-scale enterprises during five year plans. ‘Small-scale enterprises have been given an important place in the framework of Indian planning for both ideological and economic reasons Development of small-scale enter-prizes has been imbued with a multiplicity of objectives. Important among these are: (i) the generation of immediate employment opportunities with relatively low investment, (ii) the promotion of more equitable distribution of national income, (iii) effective mobilization of untapped capital and human skills, and (iv) dispersal of manufacturing activities all over the country, leading to growth of villages, small towns and far-flung economically lagging regions.' Therefore, the Goverment of India has started various programmes for the development of small-sector in India. It is worth mentioning that over the last four decades, India has built has built up perhaps one of the world’s most elaborate programmes for small enterprise development for providing assistance to the entrepreneurs for setting up small-scale enterprises. The government's objectives and intentions towards industry including small-scale industry were announced through her Industrial Policy Resolutions (IPRs). These resolutions were announced in 1948, 1948, 1977, 1980, 1990 and 1991 In this chapter, we shall state what each of the IPRs had stated about growth and development of small-scale enterprises. An account of the government support to small-scale enterprises during Five Plans will also be given. Government Policy for Small Seale Enterprises Since Independence, India has several Industrial Policies to her credit. So much so that Lawrence A. Veit tempted to say that “if India has as much industry as it has industrial policy, it would be a far well-to-do nation. “With this background in view, in what follows is a review of India’s Industrial Policies for the development and promotion of small scale enterprises in the country. IPR 1948 ‘The IPR, 1948, for the first time, accepted the importance of small-scale industries in the overall industrial development of the country) It was well realized that small-scale industries are particularly suited for the utilization of local resources and for creation of employment opportunities. However, they have to face acute problems of raw materials, capital, skilled labour. Marketing, etc. since a long period of time. Therefore, emphasis was laid the IPR, 1948 that these problems of small-scale enterprises should be solved by the Central Government with 40 Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesionalthe co-operation of the State Governments. In nutshell, the main thrust of IPR 1948, s far as small-scale enterprises were concemed, was ‘protection’. IPR, 1956 The IPR 1948 set in the nature and pattern of industrial development in the country. The post-IPR 1948 period was marked by significant developments taken place in the country. For example, planning has proceeded on an organised manner and the First Five Year Plan 1951-56 had been completed. Industries (Development and Regulation) Act, 1951 was also introduced to regulate and control industries in the country. The parliament has also accepted “the socialist pattern of society” as the basic aim of social and economic policy during this period. It was this background that the declaration of new industrial policy resolution seemed essential. This came in the form of IPR 1956. ‘The IPR 1956 provided that along with continuing policy support to the small sector, it also dimed at to ensure that Decentralised sector acquires sufficient vitality to self-supporting and its development is integrated with that of large scale industry. To mention, some 128 items were reserved for exclusive production in small sector. Thus, to the earlier emphasis of ‘protection’ was added development’. The IPR 1956 for small scale industries aimed at ”Protection plus Development”. In a way, the IPR 1956 initiated the modern SSI in India. IPR 1977 During the two decades after the IPR 1956, the economy witnessed lopsided industrial development skewed in favour of large and medium sector, on the one hand, and increase in unemployment, on the other. This situation led to a renewed emphasis on industrial policy. This gave emergence to IPR 1977."the policy statement categorically mentioned: The emphasis on industrial policy so far has been mainly on large industries, neglecting cottage industries completely, relegating small industries to a minor role. The main thrust of the new industrial policy will be one effective promotion of cottage and small-scale industries widely dispersed in rural areas and small towns. It is the policy of the government that whatever can be produced by small and cottage industries must only be so produced”. The IPR 1977 accordingly classified small sector into three categories: i. Cottage and household industries which provide self-employment on a large scale. ii, Tiny sector incorporating investment in industrial units in plant and machinery up to Rs. 1 lakh and situated in towns with a population of less than 50,000 according to 1971 Census. 4 Crested w @ nitro” professional download the ree tral online a tropd.com/orofesionaliii, Small-scale industries comprising of industrial units with an investment of up to Rs. 10 lakhs and in case of ancillary units with an investment up to Rs. 15 Lakhs, ‘The measures suggested for there promotion of small-scale sector, i, Reservation of 504 items for exclusive production in small-scale sector. ii, Proposal to set up in each district an ageney called ‘District Industry Centre’ (DIC) to serve as a focal point of development for small-scale and cottage industries. The scheme of DIC was introduced in May 1978. the main objective of setting up DICs ‘was to promote under a single roof all the services and support required by small and village entrepreneurs. What follows from above is that to the earlier thrust of protection (IRP 1948) and development (IPR 1956), the IPR 1977 added ‘promotion’. As per this resolution, the small sector was, thus, to be protected, developed and promoted. IPR 1980 The Government of India adopted a new industrial policy resolution (IPR) on july 23, 1980. the main objective of IPR 1980 was defined as facilitating an increase in industrial production through optimum utilization of installed capacity and expansion of industries. As to the small sector, the resolution envisaged. i. Increase in investment ceilings from Rs. 1 lakh to Rs. 2 lakhs in case of tiny units, from Rs. 10 lakhs to Rs. 20 lakhs in case of small-scale units and from Rs. 15 lakhs to Rs. 25 Lakhs in case of ancillaries. ii, Introduction of the concept of nucleus plant to replace the earlier scheme of the District Industry Centres in each industrially backward district to promote the maximum small-scale industries there. iii, Promotion of village and rural industries to generate economic viability in the villages well compatible with the environment. Thus, the IPR 1980 re-emphasized the spirit of the IPR 1956. the small scale sector still reminded the best sector for generating wage and self-employment based opportunities in the country. IPR 1990 The IPR 1990 was announced during June 1990. As to the small-scale sector, the resolution continued to give increasing importance to small-scale enterprises to serve the objective of employment generation. The important elements included in the resolution to boost the development of small-scale sector were as follows: a2 Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesionali, The investment ceiling in plant and machinery for small-scale industries (fixed in 1985) was raised from Rs. 35 lakhs to Rs. 60 lakhs and correspondingly, for ancillary units from Rs. 45 lakhs to RS. 75 lakhs. ii, Investment ceiling for tiny units had been increased from Rs. 2 lakhs to Rs. 5 lakhs provided the unit is located in an area having a population of 50, 000 as per 1981 Census. iii, As many as 836 items were reserved for exclusive manufacture in small-scale sector. iv. A new scheme of Central Investment Subsidy exclusively for small-scale sector in rural and backward areas capable of generating more employment at lower cost of capital had been mooted and implemented. v. With a view to improve the competitiveness of the products manufactured in the small-scale sector, programmes of technology up gradation will be implemented under the umbrella of an apex Technology Development Centre in Smal! Industries Development Organization (SIDO). vi. To ensure both adequate and timely flow of credit facilities for the small-scale industries, a new apex bank known as ‘Small Industries Development Bank of India (SIDBI’ was established in 1990. vii. Greater emphasis on training of women and youth under Entrepreneurship Development Programme (EDP) and to establish a special cell in SIDO for this purpose. viii, Implementation of delicensing of all new units with investment of Rs. 25 crores in fixed assets in non-backward areas and Rs. 75 crores in centrally notified backward areas. Similarly, delicensing shall be implemented in the case of 100% Export- Oriented Units (EOU) set up in Export Processing Zones (EPZ) up to an investment ceiling of Rs. 75 lakhs, New Small Enterprise Policy 1991 The government of India, for the first time, tabled the new small enterprise policy titled ‘Policy Measures of Promoting and Strengthening and Supplementing Small, Tiny and Village Enterprises’ in the Parliament of August 6, 1991. the main thrust of New Small Enterprises Policy is to impart more vitality and growth impetus to the sector to enable is to contribute its mite fully to the economy, particularly in terms of growth of output, employment and exports. The sector has been substantially delicensed. Concentrated efforts would be made to deregulate and debureaucratize the sector with a view to remove all fetters on its growth potential, on the ‘one hand, and reposing greater faith in small and new entrepreneurs, on the other. The salient features of this new small enterprise policy are as under: * Increase in the investment limit in plant and machinery of tiny enterprises from Rs. 2 lakhs to Rs. 5 lakhs, irrespective of the location of the enterprise. 43 Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesional«Inclusion of industry-related services .and business enterprises, irrespective of their location, as small-scale industries. ‘© To introduce a limited Partnership act. This would limit the financial liability of the new entrepreneurs to the capital invested. ‘« Introduction of a scheme of integrated infrastructural development (including technological back-up services) for small-scale industries. : © Introduction of factoring services to help solve the problems of delayed payments to small sector. © Market promotion of small-scale industries products through co-operative / public sector institutions, other specialized professional / marketing agencies and the consortium approach. © To set up a technology development cell in the small industries development organization. To accord priority to small and tiny sector in the allocation of indigenous raw materials. Setting up of an export development centre in the small industries development organization (SIDO). © To widen the scope of the national equity fund, to enlarge the single window scheme and also to associate commercial banks with provision of composite loans. Before, we close this section, let us briefly reflect on some important observations on the new small enterprise policy. These are 1. The new policy is founded on proper understanding of the fundamental problems ot small-scale sector and the measures proposed by it are well directed to mitigate the various handicaps that faces this sector. 2. Change in the definition of tiny unity has two-fold features. First, having raised the investment ceiling from Rs. 2 lakhs to Rs. 5 lakhs and done way with the location requirement (limit of 50,000 population), all new units within the investment limit of the 5 lakhs and located in bigger towns (population of 50,000 and more) will become a part of the tiny sector. Second, perhaps more significant, while earlier an industry means mainly manufacturing the new policy has now widened the scope to include industry elated service and business enterprises. This is more realistic. Now like in ‘many other countries, we have a ‘small business policy’ and not a ‘small industry policy’. 3. the new policy provides for continuous support to the tiny sector like easier access to institutional finance, preference in government purchase and relaxation of certain labour laws. Since tiny sector is the nursery of the traditional skill, the proposed package of incentives for tiny sector will help it grow with more vitality. This is welcome. 4. one major policy change related to equity participation by another undertakings upto24 per cent in small unit. The other undertakings may be small or large, Indian or foreign. This 24% equity participation is based on two basic premises. Firstly, equity 44 Crested w @ nitro professional download the ree tral online a tropd.com/orofesionalparticipation up to 24% by the outsides will not allow them to dominate in the small scale industry. Secondly, involvement of large and foreign firms in small units will bring about technology transfer from big units to small units. Thus, the new policy would prove mutually beneficial both to the large units and the small units. This ‘would further cement the economic bonds between the two sectors. However, there is another view about this 24% equity participation by other units irrespective of size of the units. Dhingra pines that ‘now big industry can float small units, legitimately hold 24 per cent share in them and get these units manufacture any of the reserved items. Does not it mean a sharp dilution in the government’s stated policy or reservation for small industry? The surreptitious approach leads one to suspect that if lacks courage of conviction. Ram K.Vepa also expresses his fears that a provision of 24 per cent equity participation by large units in small units may at a later stage facilitate the takeover of small sector by the large sector. 5. one important feature is the introduction of a new legal form of organization of business, namely, restricted or limited partnership. As per this form, the liability of at least one partner is unlimited and the liability of other partner is limited to their invested capitals. This can be considered as a welcome provision. It will atiract equity capital from friends and relatives who were earlier reluctant to advance their funds due to the limited liability of the partners. © vernment Support to Small-Scale Enterprises during Five Year Plans Steps for development of small scale and cottage industries were initiated immediately after independence. That the government has attached great importance to the development of small- scale sector in the successive five year plans can be had from glancing at the plan outlays for small sector. This is given in table . Table Plan Expenditure and Outlay on Village and Small-Scale Industries Plan Total Expenditure | (2) As Percentage of Total Expenditure (Rs. Crores) On Industry In Plan 1 2 3 4 First (1951-56) 48.00 478 2.1 Second (1956-61) | 187.00 18.7 41 Third (1961-66) __[ 248.00 12.2 2.8 Fourth (1969-73) _[ 242.00 77 15 Fifth (1974-78) | 592.00 62 15 Sixth (1980-85) 1945.00 113 18 Seventh (1985-90) [3249.00 10.7 15 Eighth (1992-97) | 6334.00 al 78 15 45 Crested-w ® nitro” professional download the ree tral online a tropd.com/orofesionalIt is seen from table that the plan expenditure on small sector has been continuously increasing. In the first five year plan, Rs. 48 crores (constituting 47.8% of total plan expenditure on industry) was spent in small-scale alone, By the end on the first plan, there were a total of size boards, i.e., All India Handloom Board, All India Handicrafts Board, All India Khadi and Village industries board, small-scale industries board, coir board and central silk board, established, thus, covering the entire field of small-scale and cottage industries. Following the recommendations of Karve Committee, the second five year plan focused on dispersal of industries. Accordingly, as many as 60 industrial were established for providing basic facilities like power, water, transport, etc., at one place. Certain itesm were reserved for exclusive production in small-scale industries. The total plan outlay of the second plan reached to Rs. 187 crores. The third plan especially stressed on the extension of the coverage of small-scale industries. As against a total plan outlay of Rs. 264 crores for the development of small-scale and cottage industries, only Rs. 240.76 crores were actually incurred in the third plan. The programmes adopted in the first three plans were extended in the fourth plan also. As a result of various development programmes, small scale witnessed significant diversification and expansion during the fourth plan period. On the eve of the fourth plan, for example, as many as 346 industrial estates had been completed and the small industrial units set up in these estates provided employment to about 82.700 persons. Their annul production was estimated at Rs. 99.25 crores. Like the third plan the fourth plan could use, only RS. 250 crores out of the total allocated outlay of RS. 293 crores. The fifth plan outlay was kept RS. 611 crores where as the actual expenditure amounted to Rs. $95 crores. The main thrust of the plan was develop small-scale industries to remove poverty and inequality stalking the land, On account of massive development programmes initiated for the development of promising small sector, the actual plan expenditure (Rs. 1945 crores) surpassed the plan outlay of Rs. 1780 crores in the sixth plan. Among the important programmes of the sixth plan were. Increase in the number of items reserved for exclusive production in small sector reaching to 836. ii, Reservation of 409 items for exclusive purchase from small-scale industries. iii, Provision of consultancy services in technical, managerial and marketing through sIDO. iv. Establishment of council for advancement or Rural Technology (CART) in October 1982 for providing necessary technical input to rural industries. By the end of the sixth plan, production from small and cottage industries increased to Rs. 65, 730 crores. Export touched to Rs. 4,557.4 crores and employment reached to 315 lakh Created with @ nitro” professional download the ree tral online a tropd.com/orofesionalpersons by the end of the sixth plan 1984-85. This accounted for 80 per cent of the total industrial employment which comes after agriculture as the biggest purveyor of employment. The main thrust of the seventh plan was up gradation of technology to increase competitiveness of small sector. The new watch ward, therefore, was “competition” and “not reservation “. Like the sixth plan, the actual expenditure of Rs. 3,249 crores was well above the plan outlay of Rs. 2,752.74 crores in the seventh plan. On account of various development Programmes, the small sector witnessed significant development in all fronts. To quote, the number of small scale units increased from 16.56 lakh persons to 18.27 lakh persons during the English plan period. The value of production increased from RS. 57,100 crores to Rs. 91,681 crores during the same period. Employment also increased substantially from 96 lakh persons to 119.6 lakh persons during the seventh plan period. The main advocation of the English plan has been employment generation as the motive force for economic growth. In order to fulfill this objective, small and village industries have been assigned an extremely important role. The important plan proposals include: 1. The plan has reiterated that timely and adequate availability of crédit is of more importance than concessional credit. From this point of view, with the establishment of SIDBI, certain new initiatives like sanction of composite loans under ‘single window concept’ concessional loans of state corporations of infrastructure development and provision of factoring services have been introduced. 2. In order to up grade technology, the English plan proposes to establish appropriate tool rooms and training institutes. 3. The growth centre approach has been accepted as a suitable measure for industrial dispersal and is under implementation. During the English plan, establishment of 70 growth centres was completed. Establishment of functional industrial estates with substantial agricultural vegetables and horticultural products was also proposed. 4. Like growth centres, the English plan also envisaged to set up integrated infrastructure development centres for tiny units. For this, the centre, the state governments and industry associations were to be involved. Small Enterprises in International Business Learning Objectives On completion of this chapter, you should be able to; Highlight the role of small scale enterprises in the national economy. Delineate the export performance and pattem of small scale units over the years. Identify the major constraints faced by small enterprises in exporting their products. Explore the possibilities for increasing exports of small industry products. ‘Submit suggestions for increasing exports of the products manufactured by small sector. 47 Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesionalIntroduction India today operates the largest and oldest programme for the development of small scale enterprises in any developing country. The small enterprises have made an impressive and phenomenal growth in units, production, employment and exports over the years. The small sector has now emerged as a dynamic and vibrant sector of the Indian economy in the recent years. An idea of the overall growth of this sector sine 1977-78 can be obtained from table . Year Number of | Production | Employment | Exports (Rs. units (in lakhs) | (Rs. In crores) | _ (in lakhs) In crores) 1977-78 2.96 14300 34.0 345 1980-81 4.48 28060 71.0 1643, 1985-86 855 61228 96.0 2769 1987-88 10.48 87300 107.0 B73 1988-89 11.59 106400 113.0 3490 1989-90 16.58 132300 119.6 7626 1990-91 19.40 157500 126.2 9100 1991-92 20.00 160000 126.6 13883 1992-93 22.35 209300 134.1 17785 1993-94 23.84 241648 139.4 17785 ‘Overal growth | 705% 1589% 158% 2740% 1978-94 ‘A remarkable feature seen from table is fast increasing exports of small enterprises to the international market. The significant role of small enterprises in the Indian economy is that it accounts for 35% of the gross value of the output in the manufacturing sector, about 80% of the total industrial employment and about 40% of the total exports of the country. Export promotion is one of the top agenda items of the economic reforms in India. In view of above, the present chapter analyses the export trends is small enterprises with focus on the constraints and potential and lastly tries to offer some concrete suggestions to promote exports of small enterprises in the economy. Export Performance and trends of Small Enterprises Exports from small enterprises have been on increase registering an annual growth of about 171 per cent during 1978-94, one way to view at the impressive growth of exports from small enterprises is their increasing share year after year to the total exports from the country. The percentage share of small enterprise exports to the total from 1971-72 onwards is presented in Table . 48 Created-w @® nitro” professional download the ree tral online a tropd.com/orofesionalTable Increasing Exports from Small Enterprises Year Total Exports Exports from | Percentage 3 to 2 ‘Small Enterprises 1 2 3 4 1971-72 1608 135 96 1976-77, 3142 766 149 1981-82 7890 2071 26.5 1986-87 12567 3644 29.0 1991-92 “44040 13883 315 1992-93 53668 17785 33.1 1993-94 69547 24149(P) 345 It is interesting to note that the total exports of the country increased by about 43 times, while the exports from small enterprises increased by about 155 times. It is important to mention here that the information presented in table is with regard to the direct exports only. Small enterprises also make indirect exports through merchant exporters, trading houses, exports houses and large enterprises. These indirect export are estimated at around 10 per cent of the total exports. It is also expected to increase in future when the ongoing economic reforms in the country start giving results. Though the growth of exports from the small enterprises is, no doubt, impressive, it is also true that India’s share in world’s exports is very low, at about 0.5 per cent. India is now the member of the World Trade Organization (WTO). Hence, it has to improve its share in world’s exports to be a global player. Given the large industrial sector’s attention focused more on internal market than the international market, on the one hand, and decreasing exports of primary products and traditional items, on the other, we need to concentrate on small enterprises to increase our exports as it holds potential for it. In order to have an idea of the export potential of small enterprises, let us examine the item wise export performance of this sector. Item-Wise Exports from Small Enterprise Table gives information about the item-wise export performance of small enterprises in 1992-93. in view of the wide range of item produced by small enterprises, only a new items i.e, sports goods, ready-made garments, leather products, processed food, plastic goods, engineering goods, electrical and electronic goods, basic chemicals and pharmaceuticals, play dominant role in exports. The share of some items in exports is as high as 100 per cent in sports goods, 90 percent in ready-made garments, 98 per cent in lac, 86 per cent is cashew, 80 per cent is leather products, 65 per cent in processed goods and 55 per cent in chemicals and pharmaceuticals and cosmetics. One interesting point to note is that four items, namely, ready-made garments, leather 49 Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesionalProducts, basic chemicals and engineering goods alone account for more than four-fifths (83.1 per cent) of the total exports from the country. These items, thus, hold good promise for increasing exports in future also. Exports of traditional products like cashew and lac is not less ¢ Products Total | Share of Small % of3to2 Exports Enterprises 1 2 3 4 T] Non-Traditional Rs Rs | products. Engineering goods | 6450.00 | 1950.00 30.23 including _ Electrical and electronics Basic chemicals, | 3623.20 | 1992.76 35.00 Pharmaceuticals and Cosmetics Chemicals and allied [ 4299.44 | 118.98 281 products Plastic products 389.55 | 175.40 45.02 Finished Teather & [3692.48 | 2953.98 30.00 leather products Marine products 1767.43 [560.81 28.67 Processed foods 1293.00 _ [840.45 65.00 Woolen Garments * | 594.65 | 208.12 35.00 Knitwear Sports goods 93.63 B63 100.00 Ready-made garments _| 8840.75 _ | 7956.67 90.00 Rayon& Synthetic [NA 15.73 NA lucts Tobacco, snuffand bidi [5.7.74 | 240.14 47230 31481.87_| 17052.67, 54.16 2 | Traditional Products Cashew “Kemel & | 749.23 | 642.46 85.75 Cashew Nut Shell Liquid Lac 52.63 31.49 97.85 Spices, spice oils, | 382.06] 38.20 10.00 oleoresins Total (E+I) 32665.79_| 1784.82 54,448 50 Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesionalHowever, the export performance of small sector exhibits some disturbing features also. 1. About 83 percent of total exports from small sector accounted for by four items alone denotes the lack of diversification in export items of small sector. Even the items having good potential for export like leather products, account for only 3 to 4 per cent of global exports. 2. At present, most of our exports are channelised to the highly competitive markets of developed countries where our products find difficult to make their headway. Hence in order to boost the SSI exports, the new potential markets need to be explored an tapped. A visit made by team from the National Small Industry Corporation (NSIC), New Delhi to south Africa recently has revealed that there is enormous potential for the Indian engineering and machinery products in this country. Major Constraints Among about 24 lakhs registered and unregistered small scale units in the country, about 90 per cent units are tiny with an investment in plant and machinery up to Rs. 5 lakhs. Technology is the crux of quality and competitiveness but, many small scale units particularly tiny units find it difficult to go for modernization and technology up gradation because of low ceiling on investment in plant and machinery. According to the second. All India Census of Registered Small Scale Industrial Units, out of 5.83 lakh units working in 1987-88, the number of exporting units was 4554 only, i.e., only 0.7 per cent of the total units. The share of exports to the total value of production within the small scale sector is also low. In 1992-93, out of the total value of production at current prices, of Rs. 2,09,300 crores, the value of exports for the year was Rs. 17,785 crores, which is tin single digit about 8.5 per cent of the total production. ‘The major constraints encountered by the small scale units in exporting their products are as follows: Credit Policy The small-scale units have very weak-base of their own funds, on the one hand, and have no access to other sources of funds like capital market, on the other. Hence, they have to depend upon the State Financial Corporations (SFCs) and the commercial banks to meet their long-term and short-term capital requirements. However, as against the minimum norm of 20% prescribed by the Nayak Committee, the actual availability of credit from the financial institutions was very low at 8.1 per cent of their output. This underlines the need for a comprehensive credit scheme targeted at small industry exports. 51 Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesionalInfrastructure Lack of infrastructure facilities like power supply, transportation and communication adversely affect the quantity and quality of production, its costs and delivery. These, in turn, tell upon the export performance of small units. The launching of a new scheme of integrated infrastructure development in rural and backward areas is a right step in right direction. Technology Technology is the crux of quality and competitiveness. However, the adoption of technology in small industries hampered due to lack of infrastructural facilities, on the one hand, and the present investment ceiling of the small scale industry, on other. Nevertheless, the Government has set up several tool rooms, production-cum-process development centres, regional testing centres and workshops, schemes of industrial parks and ISO — 9000 to break the prevailing inertia and promote exports from small scale units. The recent telecommunication revolution has offered hi-tech application for market research. which is more cost effective substitute for exploratory personal visits abroad. As a matter of fact, the conventional method of market explorations through trail and error and private contacts has been replaced by the electronic network exchanging business queries between the trading parties. Export Potential of Small Scale Units Given the weakness of small sector, one cannot conclude that small sector has no strong point which will help it emerge as a global player. The small units are inherently flexible to react to market signals and changing tastes. This makes the small enterprise more innovative and open to new ideas. Opportunities exist for small-scale sector to engage a strong player especially in the exports of the following products. Food Processing Industries ndia has been the second largest producer of a very wide variety of fruits and vegetables in the world. But, it processes less than one per cent of production. This figure of India is far behind the figures of 30 per cent of Philippines and 83 per cent of Malaysia. At the end of 1992, the number of processing units registered under Fruit Products Order was 4,057 of which 87 per cent belonged to small scale and cottage industries sector. However, India’s share in the world exports of fruit and vegetable and fish and fish’ products is just 0.3 per cent and 1.7 per cent respectively. The major reasons for country’s low share in the international markets, lack of 52 Created with @ nitro” professional download the ree tral online a tropd.com/orofesionalquality control, poor packaging, high cost of production, inadequacy of infrastructure like transport and power and non-availability of required inputs at right time and price. Considering the growing international demand for processed food, the items which hold good potential for exports from India are sea foods, spices, cashew nuts, fruits and vegetables, fruit pulp, juices, james, pickles canned fruit and vegetables, dehydrated vegetables and gaur gums. Leather Goods India has the largest cattle population and, thus, has a substantial raw material base for leather-based industries. At present, the country’s share in the world leather market is about 4 per cent and the target is to raise it by 10 per cent by 2000 because this sector holds potential for exports. However, this sector is plagued by certain weakness too. These are low volume of production units, poor quality, lac of standardization, poor delivery and absence of technological up gradation. These weaknesses need to be attended to expeditiously and adequately tap the export potential of leather goods in the country. Electronic Goods The electronic industry has registered a phenomenal compound growth rate of 35 per cent during the last decade 1981-90. the share of small sector, in 1993-94, was 40% of output and 30% of exports of electronic industry. Though the small scale industrial units have been expotting items from ordinary to hi-tech products, yet its share in the global market is very low just 0.15 per cent and that too 80% exports are form export processing zones alone. The electronic industry holds tremendous potential for exports in electronics shoftware and contract, manufacturing. This potential need to be tapped. India has the third largest technical manpower in the world. Recently, the technically qualified people have started assuming the role of exporters. Some of them have made an impressive headway in export within a short period. What is needed is to provide them support in terms of developed industrial sheds / plants and credit facility. Plastic Goods The plastic industry has made an impressive growth in recent years. At present, out of 18,500 unit manufacturing various industrial and consumer plastics, around 18,000 units are in small sector. The items of plastic exports include carriers bags garbage bags, shooping bags, woven sacks, plastic moulded household items like insulated thermoware, pens, spectacle frames, PVC hoses of these exports. There still exists enough scope to diversity the products and penetrate new markets. The main problems this industry is facing is shortage of plastic raw material, i., polymer. But, this has in tum helped the development of recycling of plastic waste industry, an eco-friendly measure, 53 Created-w ® nitro” professional download the ree tral online a tropd.com/orofesionalThese are some of the illustrative items and not an exhaustive list of exportable items. It definitely shows the good potential of small scale industry sector to increase its exports in the coming years. Some Suggestions The Government of India had accorded high priority to the development of small scale industries in the country. Under the protective and promotional policies of the government, the small scale enterprises have made their presence felt nationally and internationally. The share of small scale enterprises in the country’s exports has risen from 11 per cent in 1970-71 to 35 per cent in 1993-94. realizing the good export potential of small sector, the board of trade and ministry of commerce have identified 8 sectors and 15 items respectively for boosting exports from the small scale sector. However, the bug bear of the sector has been the inadequacies of capital, technology and marketing. If the export potential of small scale enterprises is to be tapped to the full extent, then the issues like simplification procedures, easier access to the bank and institutional credit, improvement in infrastructure and marketing issues need to be attended to expeditiously to help the country achieve a target of at least 1.5 per cent share in the world export in the next 10-15 years. We wish our small enterprises a vibrant player in the intemational maker. 54 Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesionalUNIT — 11 BUSINESS PLAN PREPARATION > Project identification & Classification > Project Formulation > Project Design & Network analysis > Project Appraisal Project Identification and Classification Meaning of Project Project classification Project identification Internal and external constraints Project objectives Desk Research and Techno-economic Survey Project Life Cycle Review Questions Meaning of Project In the precise sense, a project presupposes commitment to tasks to be performed with well defined objectives, schedules and budget. It can be defined as a scientifically evolved work plan devised to achieve a specific objective within a specified period of time. taken in this perspective, while projects can differ in size, nature, objectives and complexity, they must all partake of three basic attributes of being a course of action, of having specific objectives and of involving a definite time perspective. From the point of view of resource allocation, a project can be considered as a proposal involving capital investment for the purpose of developing facilities to provide goods or services. A project may involve the establishment of new plant for the manufacture of steel ingots, it may involve the provision of additional educational facilities to a particular age group in the community, or it may aim at developing infrastructure facilities for the marketing of agricultural products. Whatever the nature of the project, a project will involve allocation and consumption of resources on the one hand and generation of resources, goods or services on the other. Webster New 20" Century Dictionary refers to it as a scheme, design, a proposal of something intended or devised. ‘The Director of Management regards it as an investment project, carried out according to a plan in order to achieve a definite objective within a certain time and 55 Created with @® nitro” professional download the ree tral online a tropd.com/orofesionalwhich will cease when the objective is achieve. Similarly, a project according to the Encyclopedia of Management, is an organized unit dedicated to the attainment of a goal the successful completion of a development project on time, within budget, in conformance with pre-determined programme specifications. Another school of thought looks upon a project as a combination of interrelated activities to achieve a specific objective. For instance, a project according to Project Management Institute, USA, is a system involving the co-ordination of a number of separate department entities through the organization, and which must'be completed within prescribed schedules and time constraints. Project management scholars emphasis that a project a unique and non-repetitive activity aims at systematically coordinating inputs in the-direction of intended outputs. To quote Harrison, a project can be defined as a non-routine, non-repetitive, one-off undertaking normally with discrete time, financial and technical performance goals. There are still others whose primary emphasis is on appraising investment proposals from the economic and social profitability angles. For instance, according to Little and Mirrlees, a project refers to any scheme, or part of a scheme, for investing resources which can reasonably be analysed and evaluated as an important unit. The Manual on Economic Development Projects too defines a project as the compilation of data which will enable all appraisal to be made of the economic advantages and the disadvantages attendant upon the allocation of county’s resources to the production of specific goods and services. Thus, a project may be defined as a scientifically evolved work plan devised to achieve a specific objective within a specified period of time. The objective may be to create expand and/or develop certain facilities in order to increase the production of goods and/or services in the community. Project Classification Projects have been classified in various ways by different authorities. Little and Mirrelees divide the projects into two broad categories, viz., quantifiable projects and non- quantifiable projects. The Planning Commission has accepted the sectoral criteria for classification of projects. Projects can also be classified on the basis of techno-economic characteristics. All India financial institutions classify the projects on the basis of the nature of the project and its life cycle. ‘The project classifications are explained below. 1. Quantifiable and non-quantifiable projects Quantifiable projects are those in which a plausible quantitative assessment of benefits can be made, Non-quantifiable projects are those where such an assessment is not possible. 56 Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesionalProject concemed with industrial development, power generation, mineral development are forming part of quantifiable projects. ‘The non-quantifiable projects category comprise health, education and defence. 2, Sectoral Projects According to the Indian Planning Commission, a project may fall in the following sectors : Agriculture and Allied Sector Irrigation and Power Sector Industry and Mining Sector Transport and Communication Sector Social Services Sector Miscellaneous Sector vVVVVVV The sector classification of projects is quite useful for resource allocation at macro levels. 3. Techno-Economic Projects Techno-economic projects classification includes factors intensity-oriented classification, causation-oriented classification and magnitude-oriented classification. These three groupings are narrated as under. (@) Factor intensity oriented classification : The factor intensity is used as base for classification of projects such as capita-intensive or labour-intensive which depends upon the large scale investments in plant and machinery or human resources. (b) Causation oricnted classification : The causation-oriented project are determined based, on is causes namely demand based or raw material-based projects. The non-available of certain goods or services and consequent demand for such goods of services or the availability of certain raw materials, skills of other inputs is the dominant reason for starting the project. (©) Magnitude oriented classification : the size of investments forms the basis for magnitude- oriented projects. Projects may thus be classified based on its investment such as large- scale, mediumOscale and small-scale projects. Techno-economic characteristics-based classification is useful in facilitating the process of feasibility appraisal. United Nations and its specialized agencies use the Intemational Standard Industrial Classification of all economic activities (ISIC) in collection and compilation of economic data. Since this classification covers the entire field of human economic endeavour, it forms a useful basis for classification of projects. Economic activities are under this classification grouped into ten divisions, which are sub-divided into ninety sub-divisions. The divisions are: 87 Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesional- Agriculture, Forestry, Hunting and Fishing Division 1 + Mining and Quarrying Division 2 & 3 - Manufacturing Division 4 - Construction Division 5 - Electricity, Gas, Water and Sanitary Services Division 6 - Commerce Division 7 -' Transport Division 8 - Services Division 9 - Activities not adequately described Financial Institutions Classification All India and State Financial Institutions classify the projects according to their age and experience and the purpose for which the project is being taken up. “They are as follow: (New projects (i Expansion projects (ii) Modemisation projects (iv) __ Diversification projects : The projects listed above are generally profit-oriented and the services oriented projects are classified as under: (Welfare Projects * (ii) Service Projects ii) ‘Research and Development Projects (iv) Educational Projects Project Identification Project identification is concerned with the collection, compilation and analysis of economic data for the eventual purpose of locating possible opportunities for investment and with the development of the characteristics of such opportunities. Opportunities, according of Drucker are of three kinds additive, complementary and break-through. Additive opportunities are those opportunities which enable the decision-maker to better utilize the existing resources without in any involving a change in the character of business. Complementary opportunities involve the introduction of new ideas and as such do lead to a certain amount of change in the existing structure. Break —through opportunities, on the other hand, involve fundamental changes in both the'structure and character of business, Additive opportunities involve the least amount of disturbance to the existing state of affairs and hence the least amount of risk. ‘The element of risk is more in other two opportunities. When the element of risk increases, it becomes more important to precisely define the scope and nature of project idea, to develop alternative solutions for achieving the project objectives and to select the best possible approach So as to minimize both resource consumption and risks and to optimize the return or gains. Project identification can not be complete without identifying the characteristics of a project. Every project has three basic dimensions — inputs, outputs and social costs and benefits. The input characteristics define what the project will consume in terms of raw materials, energy, 58 Created with @ nitro” professional download the ree tral online a tropd.com/orofesionalmanpower, finance and organizational setup. The nature and magnitude of each of these inputs must be determined in order to make the input characteristics explicit. The output characteristics of a project define what the project will generate in the form of goods and services, employment, revenue, etc. The quantity and quality of all these outputs should be clearly specified. “In addition to inputs and outputs every project has an impact on the society. It inevitably affects the current equilibriums of the demand and supply in the economy. It is necessary to evaluate carefully the sacrifice which the society will be required to make and the benefits that will accrue to the society from a given project.] Projects do not emerge themselves. The inputs to set up a project can come from different sources such as Governmental agencies, credit and financial institutions, non- governmental organizations like chambers of commerce and industry, inter-institutional groups, technical-consultancy organizations and intemational collaborations. Once the venture ideas have been developed by entrepreneurs by following one or combination of sources explained, these have to be screened and evaluated in a preliminary fashion on the basis of internal and extemal constraints prior to being put to additional tests of pre-feasibility. This project identification comes to an end by laying down specific project objectives clearly and concisely and without any ambiguity so that these convey one and the same meaning to all concerned. Internal Constraints Intemnal constraints arise on account of the limitations of the management system, which will eventually be responsible for the implementation of a project. In India, the internal constraints for the entrepreneurs while venturing the projects comprise inputs, resources and outputs, These are narrated as under: () Entrepreneurs, while implementing the projects, rely more on outside consultants for preparation of feasibility reports in the formulation of their projects. ‘The limitation on the part of entrepreneurs to provide inbuilt project services in the form of preparing feasibility reports is an important intemal constraint in the early implementation of the project. (i) For early implementation of projects within the budgeted cost and time schedule, all the entrepreneurs cannot develop independent project managements systems, organization structure, network analysis and other elements. In such a situation, the entrepreneurs inherent internal constraints are developing well equipped project management strategies and tools while implementing them. 59 Created-w @ nitro” professional download the ree tral online a tropd.com/orofesional(iii) Project goals and objectives lay down the main purpose for which an organization exists, Practically, project management team is not much involved with the determination of project objectives. Certainly, this will be another internal constraint for the project team to achieve the unrealistic objective, which is decided by the top ‘management personnel of the business. (iv) _ The availability of the necessary internal project elements and resources are physical ‘and non-physical resources. ‘The physical resources include finance, personnel, inventories and faculties. The non-physical resources are patents, secret processes, unique experience and skills. Both physical and non-physical resources are the important constraints for the entrepreneurs to make available at a time when the project implementation is in progress. External Constraints ‘The external constraints are also another important constraint for the entrepreneurs who venture into project implementation. The important external constraints are the project environments comprising things, people and situations outside a project and also the size, nature, location and extent of the project constitute the environment of the project. The other tangible environment factors are namely social taboos, government policies and the state of capital markets. These are described as under: (@ The extemal environment factors like nature, size, location and the extent of project are the important limiting factors for the entrepreneurs when the project does not conform to the socio-economic objectives of the country. (ii) Government policies and regulations are another major hurdle for the entrepreneurs while implementing the projects. They are mainly in the form of delay in giving approval to the entrepreneurs in the medium of industrial licensing, foreign collaboration approval, CCI clearance, environmental clearance, foreign exchange permit, capital goods approval and import goods clearance. (iii) Financial institutions, banks are the important external financial source for the entrepreneurs while financing their projects. The financial institutions and commercial banks cumbersome producers and documentations system are important extemal constraints for the entrepreneurs in the form of delay in financing the projects. 60 Crested-w @® nitro” professional download the ree tral online a tropd.com/orofesionalProject Objectives Project objective is an important element in the project planning cycle, Project objectives are concemed with defining in a precise manner what the project is expected to achieve and to provide a measure of performance for the project as a whole, Objectives are the foundations on which the entire edifice of the project design is built, The essential requirements for project objectives are: (@) specific, not general; (b) not overly complex (©) measurable, tangible and verifiable (@) realistic and attainable (©) established within resource bounds (f) consistent with resources available or anticipated (g) consistent with organizational plans, policies and procedures. The project objectives are aimed to complete the project on time, completion of the project within contemplated costs and the completion of the project at a profit to the company. Project objectives are divided into two categories, namely, ‘retentive’ objectives and ‘acquisitive? objectives. Retentive objectives are concemed with the relation and preservation of resources like money, time, energy, equipment and skills. Acquisitive objectives, on the other hand, involve acquisition of resources or attaining states that the organization or its managers do not have. Project objectives are also economical and social in nature. The economical objectives of the project are ion the form of profit-oriented. The social project objectives are scrvice-oriented. The economical objectives are primarily concerned only with the primary financial costs and benefits of the project. It quantified the resources, which the project will consume in the shape of capital expenditure and maintenance expenditure, The social project objectives are inconformity with social cost benefit aspects of individual projects. The social project objective is the process of evaluating a project from the point of view of the total impact, which the project will have on the economy of the nation. Projects are to start with certain objectives to achieve specified results within the specified periods of time, Besides the specified results, which in effect are a generalized statement of Project objectives, projects achieve a number of other goals. The project formulation team should therefore try to locate as many consequences of the project activities as possible and thereafter take up the exercise of re-setting and re-defining the project objectives in unambiguous precise and as far as possible in quantitative terms, The process of project development involves a stage-by-stage development of the project idea info an investment proposition of the ensuring stage. ‘These conclusions also provide necessary 61 Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesionalmaterial for re-checking of the initial premises from which a beginning was made. At the completion of each stage, the project team should, therefore, look not only forward but also backward. The backward look is necessary to recheck and if necessary modify the initial assumptions. ‘The project team has to be ready to revise its opinions and conclusions in the light of further evidence. In fact, the success of the tem will depend on its persistence and alertness on the one hand and on its intent to be as objective as possible on the other. Desk Research and Techno-Economic Survey Desk research and techno-economic survey are two important techniques of project identification. Desk research implies the collection and use of information from published sources like journals, magazines, reports, etc. Techno-economic survey is an investigation conducted by a team of experts for identifying the industrial development potential of an area. Central and State Government agencies often commission such surveys. Data and product identification may be obtained from the following sources: (Industrial potential surveys (ii) Lead bank survey reports (ii) New process/product development in research laboratories (iv) Literature on industries within the country and abroad (v) _Import/export statistics (vi) Profitability studies of selected industries (vii) Studies on price and shortage of certain commodities ‘A distinction should be made here between demand-based industries and resource-based industries. Demand-based industries are those whose products and services are required by the existing industries as raw materials and component parts. For example large projects like BHEL, Maruti Udyong, etc. require a large number of items. The fortunes of an ancillary unit are linked to that of the parent unit. Therefore, detailed analysis of the parent unit, experience of existing ancillary units, etc should be made before setting up an ancillary. For setting up a workshop or service unit also the market demand, local competition, availability of orders, etc. should be carefully judged. Central and State goverment have reserved several items for exclusive purchase from the small scale sector. Units for this purpose also come under the category of demand-based industries. In the selection of resource-based industries, the availability of the necessary inputs must be ensured. For example, a rice bran oil mill can be set up near rice mills a poultry feed unit near oil mills, and so on. This will ensure the availability of the necessary raw materials. ‘An entrepreneur can think of setting up an import substitution industry. The Government encourages such units. However, the Government’s import policy, present demand, landed price 62 Created with @® nitro” professional download the ree tral online a tropd.com/orofesionalOf the imported item, quality differences, etc. should be considered. The demand and supply estimates should include the licenses already granted and in the process of being established, capacity utilization of thie existing units could be taken as a broad ‘indicator of market for the Product. Import statistics available from Government publications should also be analyzed for the purpose. Similarly, export-oriented units are given preference by the Government. Export statistic, demand potential of foreign markets and other relevant issues must be considered before choosing an export-oriented unit. Project Life Cycle Like human beings, projects also have a life cycle. Project life cycle consists of three main stages: 1. The Pre-investment Phase : This is the first phase in the life of a project, Itis primarily concemed with objective formulation, demand forecasting, selection of optimal strategy, evaluation of input characteristics, projections of the financial profile, and if necessary cost benefit analysis and ultimately the pre- investment appraisal. The project idea is developed into an investment Proposition during this phase. 2 The Construction Phase : This phase begins after the investment decision is taken. Resources are invested during this phase in building the basic assets of the project, which can in due course be utilized to achieve the project objectives. The assets may be in the nature of land and buildings, plant and machinery, ancillary accommodation, communication services, control systems and marketing organization. In projects not involving the use of plant and machinery, the construction phase may merely consist of developing necessary manpower resources. Thus, the construction phase consists mainly of development the infrastructure for the project. It is a one time effort. a The Normalization phase : This phase starts after the trial run of the project framework developed during the construction phase. It involves routine procedures which are performed in a cycle order. The primary objective of this Phase is to produce the goods and services for which the project was established. For this purpose, a provision has to be made for raw materials and other consumables. These can be determined by analyzing the process cycle identifying the sequence of process operations. Projects which do not involve Production of goods do not require raw materials but only supplies or supporting goods needed to sustain the project process. Thus, the assets created during the construction phase are utilized during the normalization phase. 63 Crested-w ® nitro” professional download the ree tral online a tropd.com/orofesionalPyojeet Formvdation i ‘Need Faf rrojec. to: sautation ie The entrepreneur in a developing has to encounter a number of problems while establishing a “new project. These problems cause greater concem to many enthusiastic entreprencurs. However, they could be saved to a greater extend by undertaking a project formulation exercise at the appropriate time. 1, Selection of appropriate technology: The first problem faced by an entrepreneur is in the matter of selection of appropriate technology for his enterprise. Modem technology developed in the highly industrialized countries may not be suitable for adoption in the developing countries as the conditions prevalent differ from country to country. For example, the optional size of plants recommended for a highly industrialized country may be too big for acceptance in a developing country owing to the factors such as limited market for the products and limited availability of capital and skilled labour. Hence, the entrepreneur has to examine the project idea thoroughly as regards its design production, marketing, after sales services, etc. 2. Influence of External Economies: The second problem relates to the absence or non- availability of external economies. No project can function in isolation in any economy. It has to depend on other industries for the supply of raw materials, power, tools, spare parts, etc., or on ancillary enterprises which can provide technical, financial and managerial services or on a complex net-work of communication and transport facilities or an intricate system of business practices. The entrepreneur in developing countries is, therefore, to consider not only the basic costs of the project but also the ancillary costs which in industrially advanced countries would have been contributed by the external economies. 3. Dearth of Technically Qualified Personnel: The third problem is the non-availability of technically qualified and appropriate personnel. Modern technology calls for a certain minimum supply of various skills that are generally lacking in developing countries. 4, Resource mobilization: The fourth problem is resource mobilization. In the context of present day development of the magnitude and size of project it would be very difficult - for an entrepreneur to provide the entire development capital that a project may need. 5. Knowledge about Government Regulations: Besides these problems the entrepreneur has to comprehend a number of Government directives, import and export policies, price controls, etc. The difficult is to be familiar with all these regulations, for they are not available in a consolidated and detailed form in most of the developing countries. However, in India, a compendium entitled ‘Guidelines for Industries’ has been published 64 Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesionalby the Ministry of Industrial Development. It provides information regarding the industrial policy, licensing procedures, guidelines for foreign collaboration, import and export control orders and foreign exchange orders. It also has information regarding the present status of capacities and possibilities of future development in various industrial fields like metallurgical industries, electronics equipment industries, transportation industries and the like. These problems make the entrepreneur to undergo a lot of harassment, disappointment and despair. However, a project formulation exercise undertaken at the right time mitigates the severity as well as magnitude of these problems. Concept of Project Formulation Project formulation is the systematic development of a project idea for the eventual objective of arriving at an investment decision. It has the built-in mechanism of ringing the danger bell at the earliest possible stage of resource utilization. Project formulation involves a step-by-step investigation and development of project idea. And it provides a controlled mechanism for restricting expenditure can exercise his discretion of calling off the exercise if the facts so warrant. It enables him to take decisions in a scientific way providing a concrete set of facts. Project formulation is a process involving the joint efforts of a team of experts. Each member of the team should be familiar with the broad strategy, objectives and other ingredients of the project. Besides being an expert in his area of specialization, he should be able to play his role in the overall, scheme of things. The government official who deals with the project’s final clearance has to’. treated as forming part of the team. He should be well informed about the project. A well formulated feasibility report provides a medium which cuts across scientific, social and positional prejudices and provides a common meeting ground for all those who have a contribution to make in successful implementation of project. Project team should consist of experts in major substantive fields of the project. Depending on the situation any large project should comprise the following team memibers. (a) One industrial economist (b) One market a analyst (©) One or more technologist/engineer specializing in the appropriate industry (d) One mechanical and/or industrial engineer (©) One civil engineer, if needed (®) One management accounting expert. 65 Crested-w @ nitro” professional download the ree tral online a tropd.com/orofesionalSignificance of Project Formulation ‘A well-formulated project is the best passport for obtaining the required assistance from financial institutions When there is a situation of resource constraint and the ygilable resources are allocated to vanous projects based on their importance and viability 1 well formulated project formulation is the best way of selling a project idea to a financing agency. Project formulation will also be of great assistance for obtaining necessary Government sanctions have to be obtained and also provide an independent assessment of the feasibility of obtaining these sanctions based on the existing Government policies. The project report submitted by the entrepreneur will establish his bona fides in the eyes of the bureaucracy and obtain the due Government sanction without much difficulties. Elements of Project Formulation Project formulation is by itself an analytical management aid. ‘It enables the entrepreneur to arrive at the most effective project decision. Project formulation exercise normally includes such aspects as follows: Feasibility Analysis Techno-economic Analysis Project Design and Network Analysis, Input Analysis, Financial Analysis Social Cost-Benefit Analysis, and Project Appraisal. Nave eDe Feasibility Analysis Feasibility analysis is the process of evaluating the future of a project idea within the limitavons of the proiect implementing body and the constraints imposed on the project situation by the environment. The analysis is ufidertaken to determine the desirability of investing in further development. of project ideal; When a project is taken up for development three alternatives can arise. First, the projeef many appear to be positive and in such a case the project, assessing body can proceed to invest further resources in pre-investment studies and design development. Secondly, the project may tum out to be not feasible and, therefore, further inyestment in the project idea is ruled out. Thirdly, the data is not adequate for arriving at a decision about the feasibility of the project. In such a situation, additional information must be collected and the investment decision is deferred till the final decision Projects identified are normally analyzed in order to establish their viability from different angles such as technical, marketing, financial, etc. In other words, the various 66 Crested-w ® nitro” professional download the ree tral online a tropd.com/orofesionalalternatives in marketing, technology and other considerations ate studied and then findings, with the supporting data, are presented in a systematic form. Generally, the exercise in project feasibility analysis is carried out dividing it formally into three stages, viz, prefeasibility study, feasibility study and project repost. (h) Prefeasibility Study : The project idea must be elaborated in a more detailed study. However, formulation of a techno-economic feasibility study that enables 4 deunite decision to be made on the project is a costly and time-consuming task. Therefore, before assigning funds for such a study, a preliminary assessment of the project idea must be made in a pre-feasibility study. OF Support studies such as market surveys, laboratory ion is adequate to decide that the project is not either a “lable proposition or attractive enough for a particular investor or investor group. A reversibility study differs from a detailed feasibility study primarily with regard to the detail of jhe information obiained. Even at the pre-feasibility stage itis necessary to examine, perhaps broadly, the economic alternatives of: (a) Market and plant capacity; (©) Material input; (©) Location and site; (@) Project engineering; technologies and equipment and civil engineering works; (©) Overheads; factory, administration and sales; (®) Manpower; labour and staff; (8) Project implementation; () Financial analysis investment costs, project financing, production costs and commercial profitability. Ail) Feasibility Study : It is the most important part of project analysis, for it Provides answers to questions in detail on different aspects relating to a project. In Practice this means investigating the project form six different aspects economic, technical, managerial, organizational, commercial and financial The relative importance of these different aspects varies considerably according to the type of Project involved. For example, in the analysis of public sector projects more importance is usually given product together with alternative approsches to euch Production, Such a study should also provide a project of defined production capacity at a selected location using a particular technology or technology or technologies in 67 Crested-w ® nitro” professional download the ree tral online a tropd.com/orofesional